IC-NRLF 


URRENCY  &  BANKING 


BONAMY  PRICE 


Payot,  Upham   &  Co 


Art,  E( 
Jn 


622  Wa; 

J 


Division 


Shelf  ..........................  . 


Received     ^t  /.,  187&  . 


University  of  California 


G-IFT   OF 


1876. 


CURRENCY  AND  BANKING, 


BY 

BONAMY   PRICE, 

PBOFESSOB  OF  POLITICAL  ECONOMY  IN  THE  UNIYEESITY  OF  OXFOBD. 


NEW  YOKE: 
D.  APPLETON  AND  COMPANY, 

549    AND   551    BKOADWAY. 
1876. 


PREFACE. 


THIS  work  is  founded  on  the  view  of  Currency 
and  Banking  taken  in  the  Lectures  on  the 
Principles  of  Currency,  delivered  at  Oxford,  and 
published  in  1869,  and  also  in  other  writings. 
I  have  met  with  no  reason  which,  in  my  opinion, 
requires  that  the  views  therein  expressed  should 
be  altered. 


CONTENTS. 


PACK 

CHAPTER  I. 

METALLIC  CURRENCY,     .  .  .  ,  .  „       I 


CHAPTER  II. 

PAPER  CURRENCY,              .               .                .  .  .  .36 

Sect.      I.  Convertible  Bank-Notes,  .  .  .36 

Sect.     II.  The  Bank  Charter  Act  of  1844,  •  .61 

Sect.  III.  Inconvertible  Bank-Notes,  .  .  .78 

CHAPTER  III. 

WHAT  IS  A  BANK  ?                            .               .  ,  ,  .96 

APPENDIX,              .              ,              .               »  i'  .  .163 


CURRENCY  AND   BANKING. 


CHAPTER  I. 

METALLIC  CURRENCY. 

To  commence  an  investigation  of  the  principles  of 
currency  is  to  enter  a  region  which  may  be  justly 
described  as  chaos.  The  very  sound  of  the  word 
currency  makes  a  man  turn  his  back  or  shut  his  ears ; 
his  immediate  instinct  is  to  fly  from  a  subject  with  which 
he  associates  such  unendurable  jargon.  To  obtain 
clear,  definite,  and  intelligible  knowledge  in  currency 
almost  seems  to  be  a  task  exceeding  the  powers  of  the 
human  intellect.  "There  was  no  need,"  exclaimed 
recently  an  Ex-Lord  Mayor  in  the  House  of  Commons, 
"  to  go  into  all  the  deeper  quagmires  of  bank-notes  and 
such  things,  which  no  man  could  understand  in  this 
world,  or,  as  he  believed,  in  the  next."  Yet  what  is 
currency  but  one  of  man's  own  inventions,  a  contrivance 
which  he  has  himself  devised  for  rendering  an  inde- 
spensable  service  to  the  practical  life  of  every  civilized 
people  ?  It  is  easy  to  conceive  that  the  most  familiar 
natural  objects  should  possess  secrets  which  no  research 


2       IS  MONEY  THE  ONE  INCOMPREHENSIBLE  THING? 

nor  acuteness  can  explore  ;  the  meanest  plant  and  the 
humblest  animal  inexorably  refuse  to  reveal  what  life 
is.  But  that  machinery  expressly  invented  by  man 
himself  to  accomplish  any  obvious  purpose — that  tools 
which  men  constructed  at  the  dawn  of  civilization,  and 
which  are  now  at  work  every  hour  and  in  every  country 
— that  the  action  of  such  instruments  should  be  in 
comprehensible  to  man's  reason  is  assuredly  a  most 
astonishing  marvel.  And  what  increases  the  wonder 
is  the  certain  fact  that  it  is  of  vital  importance  to  every 
nation  to  solve  correctly  the  questions  of  currency.  A 
bad  currency,  as  experience  has  only  too  often  shown, 
inflicts  severe  calamities  on  a  nation  ;  loss  and  ruin, 
public  and  private,  all  history  teaches,  are  the  deadly 
arrows  which  an  ill-constructed  currency  carries  in  its 
quiver.  Thus  every  kind  of  political  and  social  motive 
calls  for  the  right  understanding  of  a  tool  which  is  in 
every  man's  hand,  and  yet,  if  we  may  judge  from  the 
floods  of  speaking  and  writing  which  have  been  poured 
forth  about  it,  what  money  is  and  does,  what  is  a  sound 
and  what  a  bad  money,  how  it  works,  what  effects  it 
has  and  what  it  has  not,  are  matters  absolutely  undis- 
coverable. 

This  failure,  had  it  been  inevitable,  would  have  con 
stituted  the  most  wonderful  enigma  in  the  history  of 
the  human  mind  ;  but  it  is  neither  necessary  nor  real. 
Currency  can  be  easily  and  naturally  explained  if  only 
men  choose  that  it  shall  be.  It  is  the  one  subject  which 


METALLIC  CURRENCY.  3 

mortals  refuse  to  study.  Every  man  thinks  himself 
qualified  to  lay  down  rules  concerning  it,  but  without 
any  sense  of  responsibility  of  first  learning  what  it 
is.  Thus  currency  has  become  the  prey  of  every 
kind  of  arbitrary  and  ignorant  assumption.  In  other 
subjects  men  know  that  they  must  not  speak  about 
them  until  they  have  mastered  them  by  systematic 
study ;  but  every  one  thinks  himself  fit  to  dogmatise 
off-hand  on  currency.  And  who  are  the  persons 
who  inevitably  come  to  the  front  as  leaders  under 
such  circumstances  ?  The  practical  men,  those  who 
make  large  fortunes  by  handling  these  tools :  who 
so  likely  to  know  all  about  them  ?  But  do  great 
bankers  and  bill-brokers  study  currency  ?  Have  they, 
generally,  any  conception  of  disciplined  and  methodical 
investigation  of  the  real  nature  of  the  operations  they 
carry  on  ?  Do  they  follow  the  road  of  all  true  science, 
and  analyse  down  to  first  principles  ?  Had  such  been 
the  course  pursued  by  so-called  authorities,  currency 
would  not  be  in  the  mire  of  confusion  where  we  find  it 
to-day.  To  extemporise  dogma  is  far  easier ;  just  as 
great  astronomical  authorities  laid  down,  as  the  first 
principle  of  their  science,"  that  the  planets  moved  in 
circles,  for  God  Almighty  would  not  suffer  them  to 
revolve  in  any  but  perfect  curves. 

True  science  alone  is  clear  :  and  there  is  but  one  road 
to  true  science,  a  thorough  analysis  of  all  the  facts  and 
elements  of  a  subject.  With  this  law  must  be  combined 


4      ANALYSIS  ALONE  WILL  TELL  WHAT  MONEY  IS. 

another — a  firm  determination  to  accept  all  that  analysis 
teaches,  and  resolutely  to  reject  all  that  is  inconsistent 
with  it.  This  last  rule  is  of  supreme  importance  in 
currency.  No  one  accepts  calculations  which  contradict 
the  multiplication  table ;  in  currency  the  common 
practice  is  to  have  no  multiplication  table,  to  lay  down 
no  first  principle  to  which  every  doctrine  must  be 
referred.  The  absence  of  any  effort  to  establish 
logical  connection  between  new  utterances  and  pre 
viously  established  conclusions  is  the  peculiar  misfortune 
of  currency.  Let  us  then  eschew  a  priori  and  gratuitous 
theory,  the  theory  of  the  great  City  practical  man,  the 
man  of  money  ;  let  us  seek,  as  others  seek,  that  carefully 
co-ordinated  science,  founded  on  the  facts  yielded  by 
analysis,  which  alone  constitutes  true  knowledge. 

We  now  proceed  with  our  investigation.  We  seek 
to  discover  the  motive,  the  action,  and  the  laws  of 
currency.  But  the  word  currency  is  an  abstract  term,  a 
generic  expression  ;  we  must  begin  with  the  concrete, 
before  we  can  sum  up  and  generalise  in  an  abstract 
formula.  We  must  go  to  another  word,  money,  for  our 
starting  point.  Diverse  meanings  are  loosely  given  to  this 
word,  many  inconsistent  with  each  other ;  so  that  to  say 
that  currency  is  money  would  throw  no  light  upon  our 
path.  Fortunately,  however,  there  is  a  sense  of  the  word 
money  which  no  one  disputes,  which  is  recognised  by 
the  whole  world.  Whatever  else  may  or  may  not  be 
money,  coin,  at  any  rate,  is  money ;  and  coin  is  a 


METALLIC  CURRENCY.  5 

definite,  concrete,  substance.  The  derivation  itself  of 
the  word  proclaims  the  fact  :  it  comes  from  Juno 
Moneta,  whose  temple  was  the  mint  in  which  Roman 
coin  was  made,  the  stamped  pieces  of  metal  which 
constituted  the  currency  of  Rome.  Thus  the  word 
money  implies  minting,  that  is,  the  shaping  and  stamp 
ing  those  bits  of  metal  which  are  employed  in  buying 
and  selling.  Here  we  are  on  solid  ground  :  we  have 
an  objective  substance  which  it  is  our  business  to 
analyse,  as  to  what  it  is  and  what  it  does ;  every 
logical  consequence  we  obtain  from  it  we  may  rely  on 
with  perfect  safety.  No  one  denies  that  coin  is  true  and 
complete  money ;  what  coin  yields  us  belongs  to  money. 
Now  what  does  the  examination  of  a  coin  teach  us  ? 
It  is  a  shaped  piece  of  metal  with  a  mark  upon  it.  The 
first  point  we  observe  is — (we  will  speak  here  of  gold, 
confessedly  the  best  material  for  coin) — that  it  is  com 
posed  of  a  metal,  and  that  this  metal  is  a  very  valu 
able  commodity.  It  is  an  article  very  expensive  to 
procure,  possessed  of  high  value  before  it  was  manu 
factured  into  a  coin.  Whoever  has  obtained  a  sovereign, 
whether  on  the  sale  of  goods  or  in  payment  of  a  debt, 
has  given  twenty  shillings  worth  of  property  to  acquire 
it.  It  has  cost  miners  in  distant  regions,  and  under 
circumstances  often  of  great  difficulty  and  trial,  a  large 
amount  of  labour  and  a  heavy  expenditure  for  mainten 
ance  and  tools,  to  extract  it  from  the  bowels  of  the  earth. 
They  can  afford  to  part  with  it  only  on  the  same  general 


6       TO  GET  MONEY  NOT  AN  INCREASE  OF  RICHES. 

conditions  as  those  on  which  iron  or  tin  miners  give 
their  metals  to  the  community.  They  must  be  repaid 
their  expenses  and  receive  an  adequate  reward  for  the 
services  which  they  render  to  society.  The  quantity  of 
gold  won  is  small  compared  with  the  cost  of  working 
a  gold  mine ;  gold  consequently  is  dear  :  a  small  portion 
of  it  will  fetch  in  exchange  a  large  amount  of  other 
commodities.  This  satisfaction  must  be  rendered  to 
the  miners  or  the  gold  coin  will  not  be  produced  :  and 
every  one  who  acquires  that  coin  in  succession,  except 
as  a  gift,  has  been  obliged  to  restore  to  the  person  from 
whom  he  got  it  the  cost  originally  paid  to  the  miner. 
This  is  a  fact  of  capital  importance  in  currency.  No 
man  acquires  a  piece  of  metallic  currency,  of  money, 
except  by  giving  for  it  its  full  value  in  other  goods. 
From  this  fact  it  necessarily  follows  that  to  sell  property 
and  to  receive  in  the  place  of  it  golden  coins,  money, 
is  no  increase  of  riches.  It  is  an  exchange  of  two  equal 
quantities  of  wealth,  of  a  precious  metal  for  some  other 
article.  In  the  estimation  of  the  two  parties  to  a 
purchase,  the  coin  is  worth  the  property,  and  the 
property  the  coin  ;  and  that  is  the  whole  of  the  matter. 
The  bearing  of  this  truth  on  the  common  idea  that 
money  is  in  a  peculiar  sense  riches — that  the  object  of 
all  trade  should  be  to  obtain  money — that  a  trade  which 
exports  more  goods  than  it  imports,  and  brings  in  the 
difference  in  gold  is  the  truly  beneficial  trade — that 
gold  is  a  possession  more  to  be  rejoiced  in  than  any 


METALLIC  CURRENCY.  7 

other  by  every  nation  is  obvious  and  will  be  considered 
hereafter. 

The  question  immediately  arises  :  Why  do  civilized 
nations  buy  this  costly  metal  ?  Property  is  given  away 
for  it  at  all  hours  :  what  has  led  to  such  a  practice  ?  It 
is  easy  to  understand  the  pursuit  of  food  and  clothing, 
of  ornaments  for  house  and  garden ;  they  are  desired 
for  consumption  and  enjoyment.  But  it  is  otherwise 
with  a  coin.  It  is  not  procured  for  pleasure  or  orna 
mentation — nay,  it  is  obtained  to  be  parted  with  at  the 
earliest  opportunity.  It  yields  nothing  whatever  to  its 
possessor,  except  when  it  leaves  him.  This  energetic 
desire  to  acquire  money  at  heavy  cost  must  find  its 
gratification  in  something  which  money  bestows  in  the 
act  of  going  away  again.  To  keep  it  is  wholly  without 
profit  or  enjoyment ;  what,  then,  is  the  explanation  of 
this  incessant  purchase  of  gold  and  equally  incessant 
parting  with  it  as  soon  as  got  ?  The  answer  is  plain. 
Coin  is  manufactured  in  order  to  effect  a  service:  in  other 
words,  it  is  a  tool,  which  has  the  work  it  performs  as  the 
sole  reason  for  its  being  made.  It  renders  a  useful  and 
valuable  service.  In  the  act  of  passing  away  money  is 
a  tool :  it  does  its  work,  not  by  staying  in  its  owner's 
hands,  but  by  leaving  them  :  no  other  conception  of 
coin  is  rational  or  intelligible.  It  may  be  purchased 
long  before  it  is  used,  as  Napoleon  I.  stored  many 
millions  of  pounds  at  the  Tuileries  in  readiness  for 
possible  war,  or  as  bankers  pile  up  reserves  to  guard 


MONEY  A  KIND  OF  CART. 

against  the  uncertainty  of  the  payment  of  their 
debts  being  suddenly  demanded  of  them.  But  this 
changes  nothing  in  the  nature  of  money :  it  only 
indicates  that  it  is  occasionally  wise  with  jnoney,  as 
with  other  tools,  to  provide  a  stock  of  it  beforehand, 
lest  it  may  not  be  procurable  at  the  moment  when 
it  is  required  for  use.  The  truth  always  remains  the 
same  that  money  is  of  no  utility  whatever  except 
when  employed  as  a  tool,  that  is,  except  when 
it  exercises  its  proper  function  by  being  got  rid  of  in 
exchange  for  other  property.  It  is  a  machine— a 
means,  not  an  end — an  instrument  of  the  same  class  as 
a  ship  or  a  cart,  a  means  of  conveyance.  The  common 
cart  transfers  weights,  the  money  cart  transfers  owner 
ship.  Who  ever  bought  a  cart  for  the  purpose  of  enjoy 
ment  in  itself  ?  What  man,  not  under  a  delusion,  ever 
bought  money,  coin,  except  with  the  object  of  exchang 
ing  it  for  something  which  he  needed  ? 

But  why  was  such  a  tool  required  ?  A  cart  which 
should  transport  weights  which  human  arms  could  not 
carry  is  an  obvious  want.  The  intervention  of  coin  at 
first  sight  is  not  so  apparent.  Yet  the  need  of  money  in 
some  form  is  one  of  the  most  urgent  wants  which  beset 
humanity.  Without  its  aid  society  would  be  brought 
to  a  stand-still,  for  the  very  decisive  reason  that  those 
who  wanted  to  obtain  particular  goods  would  otherwise 
be  seldom  able  to  find  sellers  who  would  be  willing 
to  accept  those  which  they  had  to  offer  in  exchange. 


METALLIC  CURRENCY.  Q 

The  tailor  might  starve  before  he  found  a  baker  who  was 
in  want  of  a  coat.  This  great  want  is  the  consequence 
of  the  most  distinguishing  peculiarity  of  social  exist 
ence,  the  division  of  labour — or  rather  the  separation  of 
employments.  This  is  the  fundamental  law  of  society. 
Whether  in  a  small  village  or  a  great  nation,  whether 
in  a  poor  land  or  in  a  country  filled  with  gigantic  manu 
factures,  the  same  phenomenon  ever  presents  itself ;  the 
providing  of  the  multitudinous  things  which  human 
life  consumes  is  distributed  naturally  and  necessarily 
amongst  special  makers.  No  man  above  a  savage 
supplies  all  his  own  wants ;  every  one  has  recourse  to 
fellow-men  for  procuring  every  article  that  he  uses,  ex 
cept  those  very  few  which  he  can  make  himself.  Here 
springs  up  at  once  the  great  problem — by  what  method 
and  upon  what  principle  can  he  obtain  these  things 
made .  by  others  ?  Only  by  exchanging,  by  giving  to 
others  what  he  made  for  them,  and  receiving  from 
others  what  they  made  for  him.  But  for  exchang 
ing  each  party  to  it  must  desire  to  acquire  -the 
articles  which  the  other  offers,  otherwise  he  will  refuse 
to  exchange.  This  dilemma  might  arise  with  every 
article  needed.  The  hatter  might  find  neither  baker 
nor  butcher  nor  shoemaker  who  was  in  want  of  a  hat ; 
direct  barter  would  be  impossible,  and  his  trouble  might 
be  great.  To  overcome  this  difficulty— a  difficulty 
which  would  have  been  fatal  to  civilization — money  was 
invented  ;  and  it  removes  the  obstacle  perfectly.  The 


IO  WHY  MONEY  WAS  INVENTED. 

action  of  money  is  to  substitute  double  for  single  barter, 
and  the  difficulty  is  instantly  conquered  by  it.  The 
impediment  to  exchanging  was  that  one  of  the  ex 
changers  did  not  want  the  article  offered  by  the  other  ; 
the  solution  consisted  in  interposing  a  third  article,  for 
which  each  of  the  two  articles  might  be  separately 
bartered.  Go  and  barter  your  hat  for  money,  cried  the 
shoemaker,  then  bring  me  that  money,  and  the  shoes 
shall  be  yours.  In  other  words,  the  shoemaker  demands 
money,  and  with  it  he  selects  for  himself  in  any  shop 
any  article  that  he  desires  to  attain.  That  is  the 
action  and  essence  of  the  use  of  money.  A  sale  for 
money  is  thus  half  a  transaction — the  exchange  is  com 
pleted  only  when  the  shoemaker  has  obtained  with  the 
hatter's  money  at  his  own  choice  one  of  those  com 
modities  which  was  his  motive  for  engaging  in  the 
manufacture  of  shoes. 

I.  The  first  point  to  be  noticed  in  the  transaction 
is  that  the  seller  must  feel  sure  that  all  other  trades 
men  will  consent  to  do  exactly  the  same  thing  that 
he  has  done — will  give  him  their  goods  for  money  as 
readily  as  he  gave  away  his  shoes  for  it.  Now  this 
assurance  rests  only  on  voluntary  consent;  no  law  com 
mands  traders  to  sell  for  money.  A  banking  oracle 
of  great  eminence  once  expressed  unbounded  astonish 
ment  on  being  told  that  a  shopkeeper  was  not  bound  to 
give  his  goods  away  for  money ;  he  confounded  the 
voluntary  affixing  of  money  prices  on  goods  with  the 


METALLIC  CURRENCY.  1 1 

obligation  imposed  by  the  law  of  legal  tender  of  dis 
charging  debts  with  money.  Aristotle  knew  better,  but 
then  he  was  a  scientific  analyst  rarely  equalled  among 
men.  He  stated  that  men  "  agreed  "  to  take  money  in 
exchanging  ;  and  it  is  a  matter  of  voluntary  agreement 
to  this  hour. 

2.  But  what  is  the  foundation  of  this  voluntary  agree 
ment  to  take  money?  A  seller  cannot  part  with  his 
property  in  exchange  for  money  which  is  useless  to  him 
unless  it  furnishes  him  with  a  guarantee  that  in  the  end 
he  shall  procure  by  its  means  as  much  property  as  he 
gave  away.  How  does  money  supply  him  with  such  a 
guarantee  ?  By  the  value  of  the  metal,  as  a  commodity, 
in  the  metal  market,  of  which  the  money,  the  coin,  is 
composed.  The  coin  places  in  the  hands  of  a  tailor  a 
portion  of  metal  which  is  worth  to  a  goldsmith  as  much 
as  a  coat  is  to  the  tailor.  The  one  function  of  the  tool 
of  exchange  is  to  give  to  a  seller  a  guarantee,  a 
thoroughly  trustworthy  security,  that  he  shall  get  by 
a  second  purchase  all  that  he  gave  away  on  the  first. 
This  is  as  truly,  as  essentially,  the  work  of  money  as  to 
cut  is  the  work  of  a  knife.  This  work  is  performed  by 
giving  value  for  value,  and  it  is  precisely  because  he 
gets  value  for  value  that  a  seller  parts  with  his  property 
without  hesitation.  He  knows  that  the  same  feeling  will 
act  on  every  other  trader ;  with  metallic  currency,  with 
coin,  every  one  has  a  complete  assurance  that  he  gets 
in  money  a  commodity  worth  that  which  he  is  selling. 


I  2       THE  WORTH  OF  THE  METAL  THE  VALUE  OF  COIN. 

The  convenience  of  having  a  common  tool  to  serve  as  a 
medium  of  exchange  is  overwhelming ;  every  shop 
keeper  will  take  the  coin,  because  every  one  in  succes 
sion  is  exchanging  equal  property  for  property.  It  is 
the  value  of  the  gold  in  the  metal  market  which  enables 
the  tool  of  exchange  to  command  equal  goods  in  every 
shop.  Double  barter,  the  hat  exchanged  for  money, 
and  the  money  in  turn  exchanged  for  shoes,  thus  effects 
one  exchange,  a  hat  for  shoes,  by  the  agency  of  two 
half-transactions  :  such  is  the  action  of  money. 

But  many  deny  the  accuracy  of  this  analysis.  It  is 
the  coining,  they  say,  the  stamp  impressed  on  the 
money,  which  gives  it  its  value.  The  worth,  the  buying 
power  of  a  sovereign,  they  insist,  is  settled  by  the  stamp. 
The  Mint  coins  an  ounce  of  gold  into  £3,  173.  io^d. 
Here  is  the  definition  of  a  pound,  and  a  pound  is  the 
meaning  and  worth  of  a  sovereign.  The  absurdity  of 
these  assertions  is  so  ludicrous  that  it  would  scarcely  be 
worth  the  trouble  to  refute  them,  were  it  not  for  the 
obstinate  tenacity  with  which  so  many  persons  cling  to 
them,  to  the  consequent  confusion  of  all  ideas  on  cur 
rency.  If  the  stamp  gave  value  to  the  coin,  the  same 
stamp  on  a  piece  of  copper  would  bestow  on  it  equal  value 
with  a  golden  sovereign,  and  the  decree  of  the  Mint 
would  enable  it  to  buy  an  equal  quantity  of  goods  in' 
the  shops— which,  in  the  language  of  Euclid,  "is  absurd." 
If  a  copper  coin  could  be  obtained  from  the  miners 
only  at  the  same  cost  with  a  gold  one,  they  both  would 


METALLIC  CURRENCY.  1 3 

be  equally  valuable;  but  it  cannot,  and  so  the  gold 
smith  will  give  a  vast  deal  more  for  the  gold  coin  than 
the  coppersmith  will  for  the  copper  one ;  and  that  is 
the  very  reason  why  every  seller  will  give  many 
more  goods  for  the  one  than  he  will  for  the  other. 
That  money  is  a  commodity,  and  acts  by  virtue  of 
being  a  commodity,  was  clearly  perceived  by  Aristotle. 
"  Men  agreed,"  he  remarks,  "  for  exchanging  to  give 
and  take  one  of  the  useful  things,"  that  is,  a  commodity, 
and  consequently  a  commodity  has  ever  been  the 
instrument  of  buying,  the  tool  of  exchange.  In  one 
country  furs,  in  ancient  times  cattle,  sometimes  rock- 
salt  ;  at  this  day,  amongst  the  Tartars,  small  cubes  of 
compressed  tea,  most  frequently  some  metal.  Aris 
totle's  dictum  is  abundantly  verified  at  the  present  hour, 
in  the  case  of  English  money,  for  sovereigns  which 
foreigners  have  purchased  with  their  goods  are  con 
stantly  melted  down  abroad  into  ingots — a  proceeding 
which  could  not  possibly  take  place  if  the  stamped 
sovereign  were  worth  more  than  the  gold  it  contains. 
It  is  the  intrinsic  value  of  the  metal,  its  cost  as  a  com 
modity,  which  does  all  the  work  of  a  coin. 

The  absurdity  of  the  notion  that  the  Mint,  by  coining 
sovereigns,  assigns  to  them  their  value,  is  refuted  at 
once  by  the  remark  that  when  gold  was  some  fifteen 
times  dearer  than  it  is  now — that  is,  when  a  quantity  of 
other  commodities  fifteen  times  larger  had  to  be  given 
to  the  miner  to  persuade  him  to  dig  the  same  quantity 


14  WHAT  IS  A  POUND  ? 

of  gold  out  of  the  earth — the  same  coin  purchased  fifteen 
times  as  many  other  goods  as  it  would  now.  Prices 
were  then  fifteen  times  lower  in  nominal  amount.  A 
buyer  puts  his  own  value  on  his  money  quite  as  really 
as  the  seller  does  upon  his  goods.  Each  party  values 
for  himself  his  own  commodity  in  the  act  of  barter 
called  a  purchase.  Those  who  bring  in  the  Mint  as  a 
regulator  of  price  have  no  conception  of  the  answer  to 
be  made  to  Sir  Robert  Peel's  famous  question,  "  What 
is  a  pound  ? "  The  answer,  no  doubt,  is  furnished  by 
the  Mint,  not  in  value,  but  in  quantity.  The  Mint 
replies  by  setting  an  arithmetical  sum.  Given  that  20 
shillings  make  a  pound  and  12  pence  a  shilling,  it  de 
clares  that  a  pound  is  that  part  of  an  ounce  of  gold 
which  will  produce  .£3,  i/s.  io^d.  for  the  whole  ounce; 
in  other  words,  it  proclaims  that  in  law  and  fact  a  pound 
is  so  many  carats  weight  of  gold.  These  carats  are 
contained  in  the  current  coin  called  a  sovereign  ;  so  that 
a  pound  is  another  name  for  a  sovereign.  Whenever  a 
pound  comes  before  a  court  of  law,  it  will  compel  a 
sovereign  to  be  given  for  a  pound.  Not  a  trace  of 
value  is  contained  in  the  expression. 

3.  The  Mint  imposes  a  stamp  on  the  coin ;  for  what 
purpose  ?  To  give  information ;  to  make  known,  on 
the  word  of  the  Government,  that  the  coined  sovereign 
handled  is  made  of  standard  gold  and  possesses  in  full 
the  prescribed  weight.  In  the  words,  again,  of  Aristotle, 
"  impressing  a  stamp  on  the  money,  to  relieve  men  of 


METALLIC  CURRENCY.  I  5 

the  trouble  of  measuring  it."  As  Mr  Adams  has  well 
phrased  it,  "to  save  every  man  the  trouble  of  carrying 
about  with  him  a  bottle  of  acid  and  a  pair  of  scales." 
Ingots  have  to  be  tested  before  they  are  received  in 
payment ;  a  stamped  sovereign  or  dollar  tells  every  one 
what  it  is.  Nothing  can  be  more  obvious  than  this  fact; 
yet  how  many,  even  intelligent  men,  have  been  puzzled 
to  say  what  the  stamp  it  bears  does  for  a  sovereign. 

4.  Although  any  commodity,  in  principle,  may  serve 
as  the  tool  of  exchange,  practically,  every  nation 
that  could  obtain  the  precious  metals  has  employed 
them  as  money.  They  had  excellent  reasons  for  the 
choice.  Gold  and  silver  are  very  portable,  that  is, 
they  are  light  compared  with  their  great  value,  clean 
to  handle,  beautiful  to  look  at,  go  into  small  com 
pass,  hard  and  therefore  enduring  in  use,  retain 
the  marking  stamp  easily  and  long,  and  extremely 
divisible.  They  bear  being  cut  into  coins  of  different 
size,  with  proportionate  value  to  their  weights.  When 
much  worn,  they  still  possess  a  perfectly  real  value  up 
to  what  remains  of  metal  in  the  coins.  The  bullocks  of 
Diomed  and  America  must  have  been  very  awkward 
money,  most  hard  to  dispose  of  till  the  time  came  for 
making  purchases  with  them  ;  they  required  stables  and 
food.  The  precious  metals  do  not  deteriorate  in  their 
physical  qualities  by  being  handled  and  used.  Cattle- 
money  is  very  perishable ;  equally  so  lumps  of  rock- 
salt.  Nor  can  cattle  be  divided  ;  an  ox  could  be  dealt 


I  6       WHY  GOLD  AND  SILVER  CHOSEN  FOR  MONEY. 

with  only  as  a  whole ;  a  piece  could  not  be  cut  off  from 
him  to  serve  as  small  change.  Then  again  coins, 
especially  gold  ones,  if  no  longer  wanted  for  money, 
are  readily  convertible  into  pure  metals,  retaining  their 
full  value  as  commodities  for  use.  The  demonetisation 
of  gold  would  not  injure  holders  of  full  weighted 
sovereigns  or  dollars ;  they  would  be  converted  into 
jewels  and  ornaments  at  once.  Lastly,  the  precious 
metals  possess  in  an  eminent  degree  the  first  requisite 
of  good  money,  steadiness  of  value.  The  essence  of 
the  action  of  money  lies  in  the  guarantee  it  gives  for 
purchasing  other  goods  of  equal  value  with  those  given 
for  it ;  a  changeable  guarantee  breaks  down  in  its  most 
vital  quality.  Every  contract,  every  debt,  supposes  that 
the  value  understood  at  the  time  shall  be  paid  when 
due.  Absolute  certainty  on  this  point  is  not  obtain 
able  ;  because  value  is  expressed  in  a  commodity,  and 
there  is  not  a  single  commodity  which  is  not  liable  to 
some  fluctuation  of  value.  But  the  money  which  is 
made  of  the  steadiest  commodity  is  incomparably  the 
best.  Professor  Sumner  humorously  points  out  the  un- 
soundness  of  the  guarantee  furnished  by  several  forms 
of  money,  or  rather  of  the  tool  of  exchange.  "  If  a 
cow  will  pay  taxes,  as  it  did  in  America,  the  leanest 
cow  will  be  given.  If  corn  will  pay  a  debt,  the  corn 
which  is  of  poorest  quality,  or  is  damaged,  will  be  paid." 
No  doubt,  gold  and  silver,  on  the  discovery  of  America, 
sustained  a  heavy  change  of  permanent  value,  to  the 


METALLIC  CURRENCY.  I  7. 

great  disturbance  of  all  contracts  and  debts  stipulating 
payment  in  these  metals.  They  may  subsequently  have 
undergone  some  further  depreciation,  although  this  by 
no  means  must  be  taken  as  proved  ;  nevertheless  they 
are  less  open  to  the  charge  of  changeableness  than  any 
other  commodities. 

These  weighty  considerations  combined  have  pre 
vailed  in  establishing  metallic  coin  as  the  universal 
money ;  and  this  money  is  a  collection  of  small  portions 
of  a  precious  metal,  called  coins,  whose  weight  and  purity 
are  attested  by  the  State. 

The  right  of  attesting  the  public  money,  of  coining, 
is  usually  claimed  as  a  prerogative  inherent  in  the  State  ; 
but  this  doctrine  belongs  to  a  political  philosophy  which 
is  fast  passing  away.  Thomas  Aquinas  saw  the  truth 
long  before  it  dawned  on  the  mass  of  mankind — "Rex 
datur  propter  regnum,  non  regnum  propter  regem" 
Whatever  authority  or  right  is  possessed  by  rulers 
had  its  origin  in  the  interest  of  the  whole  people ;  but 
mediaeval  kings,  who  reaped  large  profits  from  the 
adulteration  of  the  coin,  were  slow  to  perceive  the 
application  of  this  principle  to  currency.  That  coin 
ing  should  be  exclusively  vested  in  the  State  rests  on  a 
vastly  stronger  foundation  than  prerogative ;  the  State 
can  do  the  work  best,  and  that  reason  is  sufficient  and 
decisive.  That  the  public  money  should  be  honest  and 
be  what  it  professes  to  be,  deeply  concerns  the  public 
welfare ;  and  no  attestation  furnished  by  private  persons 


1 8  THE  GOVERNMENT  THE  BEST  COINER. 

can  compete  in  authority  with  the  stamp  imposed  by 
the  Government  Mint.  Private  persons  are  capable  of 
putting  as  good  coin  into  circulation  as  the  State,  just 
as  they  circulate  ingots  ;  still  no  authentication  can  give 
a  warranty  as  good  as  that  of  the  State. 

5.  Our  analysis  lastly  teaches  us  the  origin  of  the  ex 
pression  Currency.  It  is  derived  from  the  Latin  curro, 
I  run  ;  and  our  description  shows  that  money  runs.  It 
circulates.  Its  office  is  to  place  certain  goods  in  a 
buyer's  hands  :  that  done,  it  leaves  him  in  order  to 
repeat  the  same  operation  for  the  seller  who  took  it. 
He  has  no  motive — save  occasionally  for  a  spare  stock 
— for  keeping  the  money  ;  he  accepted  it  for  his  goods 
only  to  buy  with  it  in  turn.  The  sooner  he  calls  upon 
it  to  fulfil  its  office,  and  to  run  away  from  him,  and  to 
transfer  itself  to  the  pocket  of  some  other  seller,  the 
better.  The  faster  money  circulates,  the  greater  is  the 
quantity  of  work  got  out  of  it.  The  longer  it  lies  in  a 
pocket  or  a  till,  the  more  it  assumes  the  character  of  a 
cart  or  a  plough  lying  unused  under  a  shed. 

We  now  reach  the  second  great  benefit  conferred  by 
money.  It  was  invented  in  order  to  fescape  the  insuper 
able  difficulty  presented  by  single  barter  to  the  ex 
changing  of  the  products  of  industry,  which,  by  the  law. 
of  human  life,  no  man  can  make  entirely  for  himself. 
So  they  are  all  first  bartered  for  money,  and  the  money 
re-exchanged  for  other  goods.  Thus,  as  a  necessary 
consequence,  every  commodity  is  compared  with  money; 


METALLIC  CURRENCY.  19 

the  quantity  of  money  to  be  given  for  a  particular  quan 
tity  of  the  article  is  determined  ;  in  other  words,  every 
article  acquires  its  price.  But,  by  the  fact  that  each 
article  is  compared  with  money,  and  its  exchangeable 
value  with  money  affirmed,  all  commodities  can  be  com 
pared  in  value  with  one  another.  Price  is  the  value  of 
an  article  calculated  in  money;  and  as  every  article  has 
its  price,  the  prices  of  all  can  be  compared  with  another. 
Money  becomes  a  standard  of  measurement,  precisely 
as  the  yard  is  the  standard  of  length.  Lengths  and  dis 
tances  can  be  stated  as  longer  or  shorter  than  each 
other  by  each  being  expressed  in  yards ;  so  the  relative 
worth  of  saleable  goods  is  measured  by  the  worth  of 
each  singly  being  expressed  in  money.  Thus  money  is 
the  common  measure  of  value.  Money,  however,  I  con 
ceive,  was  not  invented  for  effecting  this  great  service  of 
providing  a  common  measure  of  value  ;  the  service  was 
the  result  of  the  fact  that  money,  by  its  very  nature,  was 
measured  in  barter  against  every  commodity,  all  being 
sold  for  money.  To  get  over  the  difficulty  that  a  seller 
of  goods  might  not  want  the  other  goods  offered  by  the 
buyer  was  alone  the  true  origin  of  money. 

It  is  very  important  to  bear  in  mind  that  money  does 
not  determine  value  ;  money  only  expresses  it.  Value 
is  determined  by  each  man's  personal  feeling.  The 
maker  or  owner,  on  the  one  side — and  the  motives 
which  act  on  his  feeling  may  be  most  numerous  and 
varied — decides  how  much  he  must  receive  in  exchange 


2O       WHAT  DETERMINES  THE  VALUE  OF  MONEY. 

before  he  consents  to  part  with  his  property.  When  he 
proceeds  to  sell,  he  meets  a  counter  feeling,  a  counter 
estimation  of  the  values  of  the  property  and  the  money 
in  the  buyer.  The  resultant  between  these  two  forces 
is  the  market  value  of  the  commodity  at  the  time.  In 
the  exchange,  the  gold  and  the  commodity  are  valued 
on  identically  the  same  conditions ;  the  money  is  as 
much  bought  as  the  coat  which  it  purchases. 

The  equality  of  position  of  the  buyer  and  the  seller  leads 
up  to  the  question — What  is  the  value,  the  market  price, 
of  gold  ?  How  is  it  to  be  expressed  ?  Put  in  this  form, 
the  question  admits  of  no  single  answer.  The  market 
value  or  price  of  a  sovereign  is  a  hat  for  the  hatter,  a 
pair  of  shoes  for  the  shoemaker,  and  so  on  throughout 
all  the  list  of  things  sold.  A  hat  is  the  price  of  a 
sovereign,  just  as  a  sovereign  is  the  price  of  a  hat.  But 
the  answer  we  are  in  seach  of  will  be  found  in  the 
analysis  of  what  is  implied  in  an  act  of  barter.  What 
is  the  value  of  a  coat  to  a  tailor  ?  Its  cost  of  produc 
tion,  including  the  reward — both  in  wages  and  profit- 
without  which  he  will  not  make  the  coat  ?  It  is  the 
same  with  the  gold  of  money — either  the  owner  of  it  or 
the  miner  from  whom  he  ultimately  got  it  calculates  its 
value  in  the  same  identical  manner.  If  the  miner  fails 
to  obtain  for  his  gold  ore  a  quantity  of  goods  sufficient 
to  replace  what  the  mining  has  cost  him,  with  a  reason 
able  profit  for  himself,  he  gives  up  the  business  and 
abandons  the  mine.  Less  gold  is  produced  and  the  de- 


METALLIC  CURRENCY.  21 

mand  for  it  continues  ;  it  rises  in  value  ;  it  exchanges, 
in  buying,  for  a  larger  quantity  of  all  other  commodi 
ties.  That  is,  the  price  of  everything  sold  falls.  On 
the  contrary,  a  rise  in  general  prices  indicates  that  gold 
has  become  cheaper,  a  larger  quantity  of  it  must  be 
given  for  the  same  goods. 

There  remains  a  question  of  supreme  importance 
for  a  clear  understanding  of  currency :  the  power  of 
dealing  with  theories  of  currency,  and  language  used  on 
every  side  is  intimately  connected  with  the  question 
and  its  answer.  How  much  gold,  how  many  sovereigns 
or  dollars,  does  a  country  want  ?  To  the  multitude  the 
question  seems  absurd.  How  can  there  be  too  much 
money?  the  more  money  a  nation  has  the  better. 
With  money  one  can  buy  every  thing :  money  is  true 
riches,  so  says  the  mercantile  theory,  so  do  English 
newspapers  every  day,  so  say  the  inflationists  of  the 
United  States  all  over  that  great  country.  Every 
arrival  of  gold  from  California  or  Australia  is  hailed 
with  delight  in  England  ;  manifestly  the  country  is  so 
much  the  richer,  the  money  market  so  much  the 
stronger.  But  those  who  talk  in  this  manner  totally 
forget  that  gold  has  to  be  paid  for  like  every  thing  else. 
It  is  a  very  expensive  affair  to  get  gold  out  of  a  mine ; 
the  glorious  ingots  which  have  reached  London  have 
not  made  England  one  pound  the  richer.  They  have 
all  been  paid  for  with  English  property  of  equal  value. 
Why  then  all  this  rejoicing  ?  There  are  few  more 


2  2       HOW  MUCH  MONEY  DOES  A  COUNTRY  WANT  ? 

melancholy  delusions  than  this  indestructible  folly  of 
believing  that  it  is  always  good  for  a  country  to  get  more 
money.  If  farmers  were  to  hail  with  incessant  delight 
cargoes  of  carts  ever  streaming  in,  men  would  pity  them 
as  insane  ;  yet  in  what  respect  are  these  jubilations  over 
gold  more  rational  ?  Carts  and  money  are  both  tools 
— instruments  of  conveyance,  endowed  with  the  same 
nature,  and  subject  to  the  same  general  laws.  The 
question  for  each  is  the  same — how  many  are  wanted 
for  the  work  which  they  were  invented  to  do  ?  In  the 
case  of  money,  how  much  gold  can  a  nation  use  ?  How 
much  can  it  find  employment  for  ?  The  answer,  as  with 
carts,  must  be  sought  frorn  the  special  work  money  has 
to  perform — that  is,  from  the  amount  of  exchanging 
which  calls  for  the  agency  of  this  tool,  the  quantity  of 
property  of  which  the  ownership  has  to  be  transferred 
by  this  instrument.  A  cart  transfers  weight ;  money, 
ownership ;  and  all  the  world  knows  that  the  cartage 
to  be  done  determines  the  number  of  carts.  In  the 
same  way,/ the  ownership  of  property  which  requires 
to  be  transferred  by  the  actual  employment  of  money 
itself  determines  how  much  money  there  ought  to 
be  in  a  nation./  No  other  answer  is  possible,  unless 
it  is  denied  that  money  is  only  a  tool  ;  if  so,  another 
explanation  of  the  nature  of  money  must  be  pro 
duced.  /A  certain  amount  of  buying  and  selling  and 
paying  of  debts  goes  on  daily  in  every  country 
through  the  agency  of  money ;  enough  for  effecting 


METALLIC  CURRENCY.  2  3 

this  purpose  is  wanted  and  no  more.  /  The  number 
of  tools  needed  depends  on  the  quantity  of  work  to  be 
done  by  them  ;  that  rule  comes  from  the  nature  itself  of 
a  tool,  and  it  is  complete.  Spare  money  is  desirable, 
no  doubt,  just  as  spare  hats  and  spare  shoes,  to  guard 
against  the  inconvenience  of  there  being  none  when 
work  or  accident  calls  for  them  ;  but  this  fact  does  not 
come  into  consideration  in  this  place.  And  further, 
the  necessary  quantity  of  reserve  for  banks  must  be 
reckoned  as  money  needed  for  use.  The  one  point 
is,  has  every  man  who  wants  to  buy  or  pay  with  coin  a 
coin  to  do  it  with  ?  If  he  has,  the  supply  of  money 
is  complete ;  all  further  purchase  of  coin  or  money  is 
senseless  and  a  waste. 

But  an  important  distinction  must  be  noticed  here. 
/The  same  collective  amount  of  cash  transactions  will 
not  always  require  the  same  quantity  of  moneyt:  The 
same  coin  may  effect  few  or  many  purchases,  according 
to  the  circumstances  of  the  locality.  In  a  gambling 
house  the  same  dollar  or  sovereign  may  settle  twenty 
transactions  in  a  quarter  of  an  hour.  In  the  great  West 
it  may  remain  weeks  or  months  in  a  farmer's  pocket  before 
it  can  be  used.  In  a  nation  in  which  life  moves  slowly, 
or  buyers  or  sellers  live  wide  asunder,  or  when  no  credit 
is  given,  a  much  larger  number  of  coins  will  be  required 
to  settle  transactions  which  could  be  completed  by 
much  fewer  but  more  rapidly  moving  coins  under  the 
opposite  circumstances.  Hence /rapidity  of  circulation 


24  LITTLE  MONEY  NEEDED  BY  ENGLAND. 

when  practicable  will  diminish  the  quantity  of  money 
or  coins  required/  The  rule,  however,  remains  the  same 
under  either  circumstances  ;  enough  money  to  carry  out 
the  cash  business,  be  it  much  or  little,  must  be  provided, 
and  no  more  ;  for  more  cannot  be  used  (omitting  spare 
stocks),  all  merchants,  shop-keepers,  inflationists,  bank 
ers,  stock  exchanges,  and  newspapers  notwithstanding. 
We  thus  make  a  deduction  of  considerable  scientific 
value,  that  the  question  of  the  distribution  of  the  pre 
cious  metals,  on  which  so  much  stress  is  so  often  laid, 
is  at  bottom  only  a  question  of  the  commercial  habits  of 
different  countries  and  localities.  A  nation  is  not  the 
poorer  for  having  little  gold,  nor  the  richer  for  having 
much,  if  only  it  has  enough.  The  precious  metals  flow 
to  countries  of  low  civilisation,  of  political  insecurity, 
where  the  law  is  weak  and  justice  uncertain ;  also  to 
nations  using  large  banking  reserves,  of  which  more 
hereafter  ;  whilst  they  find  scant  resting-place  in  lands 
of  high  commercial  development,  where  property  is  safe, 
credit  secure,  the  recovery  of  debts  easy  and  to  be  relied 
upon,  and  where  the  owners  of  goods  are  willing  to  part 
with  them  for  cheques  and  bills,  and  similar  processes  of 
deferred  payment.  There  is  probably  no  country  in 
the  world  which,  in  comparison  with  the  extent  of  its 
wealth  and  its  trade,  needs  and  uses  so  little  money, 
metallic  money,  as  England. 

The  inquiry,  how  is  one  to  discover  how  much  buying 
and  selling  and  paying  of  debts  is  going  on  in  England, 


METALLIC  CURRENCY.  25 

so  as  to  learn  how  many  sovereigns  are  needed,  is 
answered  in  the  same  way  as  the  parallel  question,  how 
many  hats  does  England  require.  By  practical  trial ;  in 
no  other  manner.  The  rule  is,  so  many  heads  so  many 
hats  ;  the  actual  number  is  discovered  experimentally 
by  the  hatters.  In  precisely  the  same  manner  is  the 
number  of  purchases  and  payments  effected  by  handling 
sovereigns  and  dollars  ascertained ;  and  just  as  the 
hatter  ceases  to  make  more  hats  when  every  head  has 
got  one,  so  when  there  is  more  gold  in  a  country  than  is 
wanted  for  actual  work,  it  first  finds  its  way  into  the 
vaults  of  the  bullion  dealers  or  of  the  Bank  of  England, 
and  then  gradually  flies  away  abroad.  If  the  world 
were  full  of  gold — that  is,  if  all  the  requirements  for 
use  in  payments  (its  employment  in  the  arts  is  here 
omitted)  were  satisfied,  then  one  of  two  results  must 
follow;  either  the  miners  must  diminish  producing,  or 
gold  must  fall  in  value.  It  must  follow  the  law  of  all 
commodities  in  excess  of  demand  :  it  must  fall  in  price, 
which  for  gold  means,  it  must  be  able  to  buy  fewer  goods. 
But  what  if  a  country  .  labours  under  a  deficiency  of 
coin  ?  Is  not  this  a  very  serious  matter,  something  like 
a  calamity  ?  Nothing  of  the  kind.  In  the  first  place  it 
is  not  a  loss  of  wealth — the  country  is  none  the  poorer 
for  it ;  for  gold  cannot  be  procured  without  giving  away 
other  property  in  exchange  for  it.  There  would  be  no 
diminution  of  the  power  to  buy  goods  in  the  shops  and 
stores  because  there  happened  to  be  less  coin,  less 


26          HOW  SCARCITY  OF  COIN  WOULD  BE  MET. 

money,  as  is  so  commonly  imagined,  most  of  all  in 
America.  Goods  are  bought  with  other  goods ;  and 
the  country  would  possess  those  which  must  have 
been  sent  away  to  purchase  a  mere  machine  for  ex 
changing.  And  secondly,  some  inconvenience  would 
arise  from  a  deficiency  of  a  particular  tool.  But  that 
inconvenience  in  the  case  of  coin  would  be  something 
very  different  in  kind  from  that  which  would  arise  if 
there  were  too  few  ploughs  or  if  factory  engines  were 
suddenly  diminished.  In  these  cases  there  would 
necessarily  be  a  diminution  of  wealth  produced  ;  the 
country  would  really  be  the  poorer.  With  coin,  there 
would  simply  be  an  impediment  to  exchanging,  that 
would  be  all.  But  there  would  be  no  want  of  means  to 
meet  the  temporary  difficulty.  In  these  modern  days 
a  fresh  supply  would  speedily  be  acquired  from  foreign 
countries  ;  gold  would  be  bought  abroad,  as  it  must 
have  been  had  there  been  no  deficiency ;  and  even 
without  that  remedy  other  resources  would  be  at  hand. 
The  circulation  of  the  currency  would  undoubtedly 
become  more  rapid,  it  would,  run  faster  and  do  more 
work.  In  a  country  where  banking  was  largely  used, 
the  momentary  difficulty  would  be  trifling.  (I  am  not 
speaking  here  of  a  deficiency  of  banking  reserves,  that 
will  be  considered  under  banking.)  Small  cheques 
would  be  given  in  payment  till  an  increased  supply  of 
gold  had  come  in.  Fifty  years  ago  it  was  not  an  un 
common  occurrence  in  England  for  employers  of  labour 


METALLIC  CURRENCY.  27 

to  be  short  at  times  of  silver,  and  they  were  obliged 
to  pay  small  premiums  to  get  a  bag  of  silver  against 
Saturday  evening ;  but  such  events  have  ceased  to 
happen.  A  run  on  banks  for  gold  would  be  a  different 
matter.  It  does  not  imply  the  fact  that  we  are  here 
supposing,  a  positive  deficiency  of  the  money  required 
for  ready-money  payments  in  coin  all  over  the  country. 

One  peculiarity  of  metallic  currency  deserves  notice. 
Barring  existing  contracts  for  fixed  payments  of  coin, 
agreed  to  in  the  past,  the  public  has  no  interest  in  the 
cheapening  of  gold  for  currency  purposes,  as  of  all 
other  articles.  Cheaper  tea  is  an  increase  of  wealth; 
cheaper  gold  coin  is  not.  The  reason  of  the  difference 
consists  in  the  fact  that  the  quality  by  which  gold  does 
its  work  as  a  tool  is  value.  The  same  value  must  be 
made  up  with  coin  ;  two  sovereigns  of  ten  shillings  each 
would  be  wanted  to  make  a  purchase  formerly  effected 
with  one  at  twenty.  Cheapness  or  dearness  of  the 
precious  metal  acts  only  on  the  weight  and  size  of  the 
coins  carrying  the  same  value  in  the  purchase  of  other 
commodities — indeed,  a  great  cheapness  of  gold  would 
create  a  very  serious  inconvenience.  A  golden  shilling 
worth  no  more  than  one  of  silver  would  be  a  fearful 
aggravation  of  weight ;  the  inevitable  result  in  practice 
would  be  an  immense  disuse  of  coin,  and  a  proportion 
ate  increase  of  small  cheques,  small  bank-notes,  and 
other  machinery  for  exchanging. 

From  the  fact  that  a  large  increase  in  the  production 


28         AMOUNT  OF  CIRCULATION  UNIMPORTANT. 

of  gold  after  the  whole  world  had  acquired  a  full  supply 
for  its  currency  wants  would  necessarily  lead  to  a  fall 
in  its  value  the  inference  has  been  drawn  that  a  similar 
effect  takes  place  in  a  single  nation,  and  consequently 
great  importance  has  been  attached  to  the  amount  of 
its  circulation.  A  diminution  of  gold  in  England,  it 
has  been  argued,  makes  coin  dear,  and  causes  a  local 
fall  of  general  prices.  An  over  abundant  circulation,  it 
has  been  held,  generates  the  opposite  result,  and  con 
sequently  the  amount  of  the  circulation  in  England  is 
carefully  recorded  every  week.  I  regard  this  as  a 
very  decided  error,  and  this  circulation  theory  built 
upon  it  as  an  entire  mistake.  It  forgets  that  the 
metal  of  coin,  gold,  is  very  portable,  easily  removable 
from  one  country  to  another.  Long  before  the  coin 
was  so  scarce  as  to  act  on  prices,  the  inconvenience  felt 
would  have  fetched  supplies  from  abroad  very  speedily 
with  the  modern  means  of  locomotion.  The  slightest 
difference  in  the  purchasing  powers  of  gold  in  two 
neighbouring  lands  would  swiftly  lead  to  equalisation 
by  importation.  The  value  of  gold  is  the  same  in  all 
countries  within  anything  like  moderate  distances. 
Excess  of  gold  does  not  lower  its  value  in  a  single 
nation,  but  generates  accumulation  in  banks  ;  it  does 
not  remain  out  in  circulation,  acting  on  general  prices, 
like  inconvertible  notes.  At  this  day  sixty  millions 
sterling  lie  buried  in  the  Bank  of  France  ;  what  possible 
influence  can  that  hoard  or  any  other  hoard  exercise  on 


METALLIC  CURRENCY.  2Q 

prices  ?  When  notes  and  banking  are  at  work,  the 
quantity  of  transactions  effected  by  coin  then  becomes 
insignificant.  In  London  alone  the  Clearing  House 
accomplishes  more  buying  and  selling  in  one  week 
than  the  whole  quantity  of  gold  coin  in  the  kingdom 
amounts  to.  It  follows  that  the  quantity  of  the  so- 
called  circulation  of  the  gold  and  notes  together  is 
quite  unimportant ;  it  has  no  action  on  prices  ;  it  is  a 
curious  piece  ofvstatistics,  and  nothing  more.  All  lands 
are  linked  together  by  the  steamboat  and  the  railway. 
The  export  and  import  of  gold  has  no  significance — 
unless  it  be  for  banking,  of  which  more  hereafter. 
Whether  the  gold  of  Australia  and  California  tarries  in 
England,  or  passes  on  to  pay  for  French  wines  or 
German  wools,  or  American  cotton,  matters  nothing  as 
an  occurrence  of  currency,  nay,  it  may  be  a  great  gain. 
If  a  bad  season  has  destroyed  the  harvest,  lucky  is  the 
country  which  chances  to  have  a  store  of  gold  which  it 
can  at  once  send  abroad  to  buy  food.  The  exportation 
of  the  metal  causes  no  diminution  of  wealth.  It  was 
lying  idle  in  a  cellar,  it  departs  and  brings  in  capital, 
food  for  workmen  engaged  in  the  production  of  wealth. 
It  must  not  be  spoken  of  as  a  calamity ;  it  is  a  thing 
to  rejoice  over. 

Gold  exercises  a  most  valuable  function  in  liquidating 
the  balances  of  international  trade.  All  trade,  as 
between  individuals  so  between  nations,  is  an  exchange 
of  property,  of  wealth,  of  goods.  Every  nation  buys 


3O  INTERNATIONAL  PAYMENTS. 

abroad  with  its  own  products,  its  own  goods — it  has 
nothing  else  to  obtain  its  purchases  with.  When  a 
country  has  mines  of  gold,  gold  passes  as  a  product, 
just  as  cotton  or  wine.  If  the  buying  equalled  the  sell 
ing  every  day — as  would  happen  with  direct  barter — the 
accounts  would  always  be  balanced  of  themselves.  But 
as  purchases  and  sales  with  one  single  foreign  country 
are  not  always  equal,  there  remains  on  a  given  day  a 
balance  to  settle,  and  that  is  done  with  an  export  of 
gold  from  the  country  which  bought  most  to  the  country 
which  has  sold  most.  At  times  this  difference  is  large, 
as  when  a  bad  harvest  or  famine  urges  on  immediate 
and  large  purchases  of  food,  and  sufficient  gold  at  the 
moment  might  be  difficult  to  procure.  But  the 
machinery  of  modern  commerce  here  comes  in  aid  ; 
bills — which  are  only  deferred  payments — are  brought 
into  play,  and  often,  before  they  are  due,  the  balance 
has  been  corrected  with  the  export  of  goods.  In  any 
case,  as  Adam  Smith  has  well  remarked,  England  can 
replenish  itself  with  gold  from  abroad,  if  she  has  the 
wherewithal  to  pay  for  it.  Trade  never  is  anything  else 
at  last  but  exchange  of  goods. 

International  payments  require  the  currencies  of  dif 
ferent  countries  to  be  compared  with  one  another. 
Each  country  sells  upon  prices  estimated  in  its  own 
money;  hence  in  international  exchanging  two  accounts 
have  to  be  settled  together,  each  expressed  in  different 
monies.  How  is  the  position  of  each  towards  the  other 


METALLIC  CURRENCY.  3! 

to  be  calculated?  They  must  be  reduced  to  a  common 
measure — to  gold.  French  Napoleons  and  francs  must 
be  converted  into  weights  of  gold ;  so  must  the  English 
pounds  and  shillings.  This  operation  is  carried  out  by 
expressing  the  coin  of  the  one  country  in  the  coin  of  the 
other.  The  weight  of  gold  in  an  English  sovereign  is 
compared  with  the  weight  of  the  same  metal  in  French 
francs,  calculated  on  the  basis  of  the  weight  of  gold  in 
the  twenty-franc  piece,  the  Napoleon.  The  discovery  is 
made  that  twenty-five  francs,  and  some  ToVths  more, 
express  the  same  weight  of  gold  as  the  English 
sovereign,  and  this  equality  is  called  the  par  of  ex 
change.  When  the  exchange  is  at  par,  a  man  who  has 
an  English  sovereign  can  obtain  these  francs,  and  vice 
versa  the  francs  will  get  a  sovereign.  A  bullion  dealer 
who  bought  two  heaps  of  sovereigns  and  Napoleons  on 
this  basis,  and  melted  the  gold  into  ingots,  would  get 
exactly  the  same  quantity  of  ingots  from  each  heap. 

But  exchange  seldom  stands  at  par  between  two 
countries,  for  a  very  sufficient  reason  :  the  buying  and 
selling  is  seldom  equal  on  the  same  day;  the  difference, 
as  explained,  they  agree  shall  be  liquidated  in  gold. 
Now  to  send  gold  involves  a  charge  for  carnage  and 
insurance ;  and  the  man  who  has  to  send  it  will  avoid 
this  charge  if  he  can.  Goods  purchased  in  foreign 
countries,  all  except  the  small  balance  liquidated  in 
gold,  are  paid  by  the  exchange  of  debts,  by  bills.  The 
English  debtor  pays  his  French  creditor  by  sending 


32  THE  EXCHANGES. 

him  a  bill  due  by  a  French  debtor  for  English  goods 
sent  to  France.  If  the  purchases  in  the  two  countries 
are  equal,  so  will  be  the  bills  created  by  them.  If  not, 
then  some  debtor  will  be  unable  to  find  a  bill,  and 
every  debtor  in  the  country  which  has  to  pay  most  to 
the  other  will  compete  with  all  the  others  not  to  be  the 
man  who  will  have  to  incur  the  expense  of  sending 
gold.  He  will  offer  for  a  bill  rather  more  than  its  value 
in  metal  at  the  par  of  exchange.  The  Frenchman  will 
give  at  Paris  say  25  *^  francs  for  a  pound  due  in  London 
rather  than  send  gold.  If  trade  had  moved  in  the 
opposite  direction,  and  England  owed  more  to  France 
than  France  to  England,  it  will  be  the  English  debtor  in 
London  who  will  be  eager  to  buy  in  London  a  bill  due 
by  a  Frenchman  in  France;  he  will  give  a  sovereign 
for  24^  francs  to  be  paid  in  France.  In  the  former 
case  the  exchange  is  said  to  be  in  favour  of  England  ; 
the  Englishman  gets  a  quarter  of  a  franc  more  than  the 
gold  of  his  pound  at  par.  In  the  second  case,  the  ex 
change  is  pronounced  unfavourable  ;  the  Englishman 
gets  less  gold  in  24^  francs  than  he  gave  away  in  his 
pound.  A  favourable  exchange  implies  that  England 
has  sold  more  than  she  has  bought ;  she  has  a  balance 
to  receive  in  gold.  An  unfavourable  exchange  implies 
the  reverse,  that  is,  she  is  a  debtor  on  that  day's  settle 
ment.  But  the  exchange  will  not  rise  above  par  beyond 
the  cost  of  carriage  and  insurance  for  the  transmission 
of  gold.  If  it  costs  half-a-franc  to  send  a  pound's  weight 


METALLIC  CURRENCY.  33 

of  gold  to  England,  the  Parisian  debtor  will  accept  an 
exchange  which  makes  him  give  25^  francs  for  a  pound 
to  be  paid  in  England,  but  he  will  refuse  one  of  25^; 
it  will  cost  him  less  to  send  the  gold. 

Falser  and  more  misleading  expressions  cannot  be 
conceived  than  the  terms  favourable  and  unfavourable 
exchanges.  They  survive  still  the  memorable  refuta 
tion  of  their  untruth  by  Adam  Smith  ;  they  involve 
ignorance  of  the  very  nature  of  all  trade ;  they  efface 
the  living  fact  that  men  buy  of  foreign  countries  to  pro 
cure  goods  for  use  and  consumption,  that  all  trade  is 
only  an  exchange  of  goods.  This  language  is  pro 
foundly  unconscious  that  gold  is  a  mere  tool.  It 
teaches  that  gold,  or  coin,  or  money,  is  an  end,  a  good 
thing  for  its  own  sake,  an  article  worth  giving  one's 
wealth  to  obtain.  It  is  saturated  with  the  Mercantile 
Theory,  so  utterly  in  vain  has  Adam  Smith  written. 
These  words  express  satisfaction  at  the  proof  that 
England  has  sold  more  than  she  has  bought,  spreading 
the  delusion  that  an  excess  of  exports  over  imports  is 
an  excellent  state  of  trade  ;  that  it  is  a  good  thing  to 
spend  and  consume  wealth  in  making  iron  and  yarns, 
and  to  get  gold  in  the  place  of  them, — for  what  object 
they  do  not  say.  They  perpetuate  the  merchant's  and 
the.  shopkeeper's  absurdity  that  to  sell  is  everything, 
ignorant  that  to  sell  without  buying  is  to  convert  a 
man  into  a  Midas,  and  to  make  him  perish  amidst 
piles  of  gold.  The  value  set  on  favourable  exchanges 


34  A  DOUBLE  STANDARD. 

is  the  greatest  intellectual  and  literary  wonder  of  our 
age. 

It  remains  to  say  a  few  words  on  a  double  standard. 
In  some  countries  a  gold  or  a  silver  coin  is  a  legal 
tender  for  the  payment  of  debts.  The  expression  legal 
tender  arises  only  on  the  payment  of  a  contract  to  pay 
money,  of  a  debt ;  it  means  that  the  law  will  declare  the 
debt  to  have  been  paid,  if  the  legal  tender,  money,  has 
been  given.  A  double  standard  gives  the  debtor  the 
choice  of  paying  in  gold  or  silver  coin  as  he  pleases. 
Now  if  the  value  of  the  metal  given  in  the  metal  market 
is  the  same,  whether  gold  or  silver  has  been  offered,  the 
contract  is  justly  fulfilled,  and  neither  party  has  an 
advantage  over  the  other.  The  law  fixes  the  relative 
quantities  of  the  two  coins  or  metals  which  may  be 
given.  In  England  it  says  that  twenty  shillings  and  one 
sovereign  are  the  same  money.  But  unfortunately  the  law 
cannot  secure  that  the  metallic  value  of  either  silver  or 
gold  will  remain  unchanged  ;  if  there  is  an  alteration  in 
the  value  of  either,  it  is  plain  that  twenty  shillings  may 
be  worth  more  or  less  than  a  sovereign.  A  debtor  will 
always  choose  to  pay  in  the  coin  which  is  cheapest, 
which  it  costs  him  less  of  his  wealth  to  obtain.  If 
silver  becomes  cheaper  than  gold,  the  English  gold 
sovereign  will  be  sold  abroad  to  buy  silver,  which  will 
be  brought  to  the  English  Mint  to  be  coined,  and  debts 
will  be  paid  with  it  with  a  profit.  Hence  the  practical 
rule  has  been  laid  down  that  -the  inferior  currency  will 


METALLIC  CURRENCY.  35 

expel  all  others  from  a  country,  that  is,  the  money 
whose  metal  is  valued  too  highly  in  the  coin  in  the  pro 
portions  established  between  the  coin  of  both  metals 
will  be  sought  by  all  debtors,  because  they  can  purchase 
it  with  a  profit  with  the  metal  which  is  introduced  in 
the  coin.  In  England  the  proportion  of  twenty  shil 
lings  to  the  pound  has  long  existed,  in  spite  of  many 
fluctuations  in  the  metallic  value  of  silver.  The  banish 
ment  of  the  gold  has  been  prevented  by  the  declaration 
that  silver  shall  not  be  a  legal  tender  beyond  forty  shil 
lings.  This  has  kept  shillings  a  purely  subsidiary  money 
— over-valued,  with  too  little  silver  in  them  to  be  a 
twentieth  part  of  a  golden  sovereign,  but  not  so  little, 
and  they  not  so  numerous,  as  to  make  it  worth  while  for 
coiners  to  manufacture  them  out  of  honest  silver.  A 
double  standard  seems  to  me  unsupported  by  adequate 
reasons,  and  it  entails  the  injustice  that  a  debtor  is 
enabled  by  it  to  pay  his  creditor  with  a  smaller  value 
of  metal  than  was  contracted  for.* 

*  See  Appendix  A,  page  173. 


CHAPTER     II. 

PAPER  CURRENCY. 
Section  I. — Convertible  Bank-Notes. 

WE  have  now  ascertained  the  nature  and  principles 
of  a  metallic  currency  ;  we  proceed  to  paper  currency, 
and  we  shall  find  the  same  general  principles  to  prevail 
here  also,  subject  only  to  such  modifications  of  detail 
as  are  created  by  the  difference  between  paper  and 
metal.  Coin  and  bank-notes  perform  generally  the 
same  work.  They  transfer  property,  and  thus  ex 
change  commodities.  Both  were  invented  to  effect  the 
same  purpose.  What  we  have  gained  in  the  study  of 
metallic  currency  must  be  firmly  adhered  to,  or  mis 
chievous  untruth  will  be  the  result. 

But  it  is  necessary  to  explain  the  word  currency.  In 
America  the  expression  is  frequently  used  to  denote 
instruments  of  exchange  other  than  money — all  those, 
namely,  that  consist  of  paper ;  but  this  is  a  practice 
much  to  be  deprecated.  There  is  too  much  confusion 
already  in  currency  to  excuse  the  increase  of  it  by  affix 
ing  new  senses  to  old  words.  This  mode  of  speaking  is 
further  open  to  the  objection  that  it  classes  under  one 


PAPER  CURRENCY.  37 

term  things  very  dissimilar ;  for  a  cheque  and  a  bank 
note  are  very  different  matters.  A  cheque  is  not 
currency,  does  not  run.  The  word  currency  is  needed 
as  a  generic  term  to  comprise  two  varieties  of  similar 
tools  which  are  current  and  circulate,  and  are  univer 
sally  called  money.  Both  stay  out  in  the  hands  of 
the  public.  A  cheque,  on  the  contrary,  travels 
straightway  to  the  bank  which  has  to  pay  it.  A 
bill  is  slightly  more  current ;  it  may  pass,  as  a  tool  of 
exchange,  through  a  few  hands  by  the  help  of  endorse 
ments,  but  it  has  a  fixed  day  for  being  paid  and 
annihilated.  There  is  one  distinction  more  between 
these  machines  for  payment  and  the  bank-note.  They 
are  personal,  so  to  speak.  Every  man  who  takes  them 
knows  that  he  is  bound,  for  his  own  safety,  to  weigh 
their  signatures.  There  is  a  distinct  act  of  reflection  in 
giving  goods  for  cheques  or  bills.  Hence,  in  popular 
language,  they  are  not  money,  things  which  everybody 
takes  as  a  matter  of  course.  The  bank-note,  on  the 
contrary,  is  almost  impersonal.  It  is,  in  a  manner, 
semi-anonymous ;  when  a  bank  is  once  thoroughly 
established,  its  notes  travel  unchallenged  all  over  the 
town. 

But  is  the  bank-note,  for  all  that,  money  ?  It  is 
called  money ;  so  are  bills,  occasionally.  Cheques 
earn  the  title  still  more  frequently.  A  shopkeeper, 
when  he  carries  bills,  cheques,  and  cash,  to  the  bank, 
calls  them  all  money.  Even  Mr  Bagehot,  in  his 


30  COIN  ALONE  MONEY. 

"Lombard  Street,"  written  expressly  to  explain  the 
Money  Market  as  being  "  as  concrete  and  real  as  any 
thing  else,  capable  of  being  described  in  as  plain  words, 
so  that  it  is  the  writer's  fault  if  what  he  says  is  not 
clear,"  gives  six  different  meanings  to  the  word  money. 
What,  after  this  in  a  writer  of  ability  and  reputation, 
must  be  the  state  of  mind  of  ordinary  mortals  upon 
apparently  so  well  known  a  thing  as  money?  And  this 
marvellous  looseness  of  expression  runs  the  same  course 
in  private  as  in  commercial  life.  A  rich  man  is  said  to 
have  so  much  money  in  cash  or  in  railway  stock.  The  ob 
jects  comprehended  under  this  multiple  word  by  popular 
language  are  as  countless  as  the  sand  on  the  sea-shore. 
/  Coin,  metallic  coin,  alone  is  true  moneyy  and  nothing 
else  is,  unless  it  be  a  commodity,  as  an  ox,  or  a  cow,  or 
a  piece  of  salt.  There  is  a  very  decisive  reason  for  this 
assertio^i.  Every  kind  of  paper  styled  money  carries 
on  its  face  an  order  or  promise  to  pay  money^;  and 
without  that  order  or  promise  it  would  be  a  worth 
less  piece  of  paper  and  nothing  more.  An  order  or 
promise  to  give  a  thing  is  not  the  thing  itself;  the 
thing  is  absent.  This  settles  the  matter  absolutely : 
paper  is  not  money.  It  is  idle  to  reply  that  the  dis 
tinction  is  unimportant — that  the  bank-note  does  the 
same  work  as  money,  and  that  practically  there  is  no 
harm  in  calling  it  money.  I  answer  that  the  harm  is 
immense  for  the  understanding  of  currency.  The  vital 
fact  is  obscured  that  the  man  who  takes  a  gold  coin  for 


PAPER  CURRENCY.  39 

his  goods  receives  an  actual  piece  of  property,  a  metal, 
as  valuable  as  the  thing  he  sells.  He  acquires  not  a 
particle  of  substance  with  a  cheque  or  a  bank-note.  If 
the  cheque  is  dishonoured  or  the  bank  breaks,  he  finds 
a  nothing  in  his  hand  against  the  wealth  that  he  gave 
away.  If  cheques  and  bank-notes  are  true  money,  then 
so  are  spoken  words,  for  they  can  purchase  property, 
and  bind  the  buyer  at  law  just  as  strongly  as  a  cheque. 
To  tell  a  bookseller  to  put  five  pounds'  worth  of  books 
to  his  account  commits  the  buyer  to  payment  as  com 
pletely  as  a  cheque.  Coin  is  the  substance,  the  reality 
covenanted  to  be  given  for  goods  bought ;  consequently 
coin  alone  is  payment.  The  coin  at  last  may  never  be 
touched,  because  it  may  be  put  down  in  an  account 
against  which  set-offs  appear  on  the  debtor  and  creditor 
sides ;  coin  then  is  not  asked  for,  because  its  equivalent  in 
property  has  been  received.  Everything  else — spoken 
words,  shop-accounts,  bank-notes,  cheques,  warrants — are 
nothing  but  title-deeds,  evidence  good  at  law  to  com 
pel  the  stipulated  payments  in  coin,  if  not  voluntarily 
given.  Without  a  court  of  law  in  the  background,  they 
are  only  acknowledgments  resting  on  honour,  and  may 
at  any  moment  prove  to  be  empty  writing.  Coin  pays, 
no  form  of  paper  does  till  what  is  written  upon  it  is 
fulfilled.  A  bank-note  is  not  property  placed  in  a  man's 
hands ;  every  seller  may  decline  to  take  it.  If  the 
bank  fails,  the  holder  will  never  be  paid  at  all. 

The  truth  that  bank-notes  are  not  money  received 


4O        THE  JUDGMENT  OF  CHIEF  JUSTICE  CHASE. 

a  remarkable  confirmation  from  an  elaborate  judgment 
delivered  in  the  Supreme  Court  of  the  United  States. 
The  question  which  presented  itself  for  final  decision 
was  whether  debts  which  had  been  contracted  previ 
ously  to  the  Act  of  Congress,  which  made  the  incon 
vertible  bank-notes  called  greenbacks  legal  tender,  were 
discharged  by  the  tender  of  these  notes.  Nothing  could 
be  sounder  or  more  admirable  than  the  doctrine  laid 
down  by  Chief  Justice  Chase.  He  ruled  that  such 
debts  were  contracts  to  deliver  money,  and  that  bank 
notes  were  not  money,  and  could  not  be  forced  upon  a 
creditor  as  a  satisfaction  of  his  claim.  The  distinction 
that  coin  alone,  the  metallic  dollar,  was  money,  was 
most  sharply  and  accurately  drawn,  and  the  right  of  the 
creditor  to  the  covenanted  payment  as  clearly  estab 
lished.  A  bank-note  was  pronounced  not  to  be  pay 
ment  ;  it  did  not  fulfil  the  contract  entered  into  to  de 
liver  money.  The  case  was  wholly  different  with  debts 
contracted  subsequently  to  the  enactment  of  the  law  which 
declared  greenbacks  legal  tender.  The  creditor  had  been 
distinctly  warned  beforehand  that  the  word  dollar  would 
be  understood  by  the  law  to  mean  that  particular  piece 
of  paper  which  contained  an  acknowledgement  of  debt 
due  by  the  Government  of  the  United  States.  He  knew 
when  he  gave  credit  on  an  undertaking  to  be  repaid  in 
dollars  that  he  would  receive,  not  money,  but  the 
transfer  of  a  debt  expressed  on  paper  which  was  due 
by  the  Government.  He  did  not  stipulate  for  money, 


PAPER  CURRENCY.  41 

and  consequently  money  he  was  not  entitled  to  and 
would  not  receive.  He  would  get  dollars,  as  interpreted 
by  the  law  of  legal  tender,  not  the  metallic  dollars 
which  are  money,  but  a  promise  made  by  the  Govern 
ment  to  pay  such  dollars,  without  any  stipulation  as  to 
the  time  when  they  would  be  given.  It  was  for  him  to 
consider  when  he  gave  away  his  goods,  what  the  promise 
of  a  dollar  or  the  piece  of  paper  might  be  worth  in  the 
stores. 

/  Nevertheless,  though  bank-notes  are  not  money,  it  is 
hopeless  to  try  to  strip  them  of  that  title.  When  the 
bank-notes  are  established  in  public  confidence,  it  is  im 
possible  to  maintain  the  distinction  between  them  and 
coin  in  popular  language.,)  Mixed  together  in  the  same 
purse,  the  common  heap  is  regarded  as  money.  They 
both  do  the  same  work,  both  circulate  and  purchase 
with  equal  ease,  both  raise  no  other  idea  than  that  they 
are  money  to  buy  with.  The  radical  distinction,  however^ 
between  them,  that  coin  makes  a  real  payment  and  notes 
do  not,  is  of  the  utmost  scientific  importance ;  the  differ 
ence  meets  the  inquirer  at  every  turn  in  examining  the 
nature  and  action  of  bank-notes. 

But  it  is  otherwise  with  the  applications  of  the  word 
money  referred  to  above.  Every  man  who  has  the 
interest  of  Political  Economy  at  heart,  and  wishes  to 
guard  against  the  mischievous  consequences  of  an  un 
sound  currency,  is  bound  to  protest  against  such  an 
abuse  of  language.  The  abbreviations  and  the  slang  of 


42  NOTES  ACT  AS  MONEY. 

the  Stock  Exchange  and  of  banking  incessantly  corrupt 
ideas  on  currency ;  confusion  of  language  ever  begets 
confusion  of  thought,  y 

Let  us  now  examine  (how  it  comes  to  pass  that 
a  bank-note  is  able  to  act  as  money.  Coin  places  in  the 
hands  of  a  seller  a  commodity  as  valuable  as  his  own. 
The  value  of  the  metal  of  the  coin  in  the  metal  market 
furnishes  him  with  a  trustworthy  guarantee  that  he  will 
be  able  with  it  to  buy  in  any  shop  another  commodity 
worth  as  much  as  the  one  he  sold.  A  guarantee  is  the 
essence  of  a  tool  of  exchange  :  what  is  the  guarantee 
supplied  by  a  bank-note  ?  The  answer  rests  on  a  prac 
tical  fact.  ^Experience  shows  that  men  are  willing  to 
sell  on  credit — that  is,  on  deferred  payment ;  for  that  is 
the  meaning  of  credit.)  They  rely  on  the  law  which 
compels  debtors  to  make  payment  at  the  due  time  ;  if 
there  is  no  law  they  can  rely  upon,  as  in  barbarous 
countries,  they  will  not  sell  on  credit.  Credit  next  takes 
a  further  step  as  civilisation  expands  ;  a  seller  will  give 
away  his  goods  not  only  on  the  credit  of  the  buyer,  he 
will  also  be  willing  to  accept  a  debt  due  to  him  as  pay 
ment.  This  is  the  essence  of  the  action  of  a  bank-note. 
/"Such  a  note  acknowledges  that  the  issuer  owes  the 
money  stamped  on  it  to  the  holder  of  the  note.  A  seller 
by  taking  the  bank-note  makes  himself  the  creditor  of 
the  Government  or  bank,  and  is  willing  to  part  with  his 
property,  substantially,  on  credit  to  the  State  or  bank?) 
He  finds  in  this  debt,  now  due  to  him,  of  the  issuer  of 


PAPER  CURRENCY.  43 

the  bank-note  a  sufficient  guarantee  for  being  able  to 
buy  with  it  other  goods.  Such  a  guarantee  suffices  also 
for  the  seller  all  over  the  town.  The  guarantee  of  a  coin 
is  value,  not  physical  qualities  ;  a  good  debt  is  regarded 
universally  as  possessing  equal  value  ;  hence  it  does  as 
well  as  the  coin.  Every  buyer  with  a  note  virtually 
says  : — "  I  have  no  money ;  give  me  the  goods  and  I 
will  tell  a  good  man  who  owes  me  money  to  pay  you 
for  me."  That  is  the  action  of  a  bank-note  and 
cheque.  This  is  satisfactory  to  the  seller.  He  does  not 
want  the  coin  as  coin,  but  as  value,  and  a  sound  debt  is 
as  valuable/  The  paper  money  has  some  special  advan 
tages  ;  it  is  light  to  carjy  and  far  easier  to  keep  in 
safety  than  coin,}  whilst,\by  the  help  of  the  number 
marked  upon  it;  it  imparts  considerable  security  against 
robbery. 

Thus  a  bank-note  is  an  excellent  tool  of  exchange, 
but  on  one  vital  condition,  that  it  is  as  trustworthy  as 
the  metal  itself  of  the  coin.  The  instant  that  the  note 
is  unable  to  procure  the  gold  mentioned  on  its  face, 
because  the  debtor  is  supposed  to  be  insolvent,  it  sinks 
into  a  mere  piece  of  paper.  Its  holder  is  now  unable  to 
buy  with  it :  he  must  keep  it  as  a  bad  debt,  for  what 
ever  it  may  prove  to  yield  ultimately. 

Paper  money  has  one  further  superiority  of  great  im 
portance  over  coin  i  its  comparative  cheapness  com 
bined  with  equal  efficiency^  Twenty  shillings'  worth  of 

English  wealth  must  have  been  given  to  a  foreign  miner 
3 


44  HOW  DID  BANK-NOTES  ORIGINATE  ? 

to  procure  a  sovereign  ;  a  bank-note  costs  less  than  six 
pence.  This  gain  to  England,  this  saving  on  the  cost 
of  the  indispensable  tool  of  exchange,  extends  to  every 
bank-note  in  circulation ;  how  vast  the  capital  is  thus 
rescued  and  kept  for  the  maintenance  of  English  in 
dustry,  whilst  the  supply  of  the  fitting  tools  is  complete, 
is  obvious. 

We  come  now  to  the  very  important  and  much- 
debated  inquiry,  how  these  paper  machines  for  ex 
changing  ought  to  come  into  existence.  [  The  cheque 
and  the  bill  possess  an  individual  character  ;  they  are 
created  and  ended  by  single  transactions ;  particular 
goods  are  purchased  with  them  ;  the  banker  pays  the 
cheque,  the  acceptor  the  bill,  and  both  cheque  and  bill 
disappear.  J  [The  origin  of  the  bank-note  is  not  so 
obyJQUsA  Assuming,  for  the  present,  that  it  has  been 
issued  by  a  bank,  how  did  the  bank  manage  to  get  it 
into  circulation  ?  By  paying  its  debts  with  it.  A  bank 
owes  money  to  its  depositors  ;  ,when  they  draw  it  out, 
they  are  generally  willing,  nay  prefer,  to  receive  it  in 
the  form  of  bank-notes.  It  is  the  same  when  a  Govern 
ment  is  the  issuer.  It  owes  money — whether  to  pay  in 
terest  on  a  national  debt,  or  on  the  purchase  of  supplies 
and  stores  for  its  wants ;  it  (  pays  with  notes,  which 
pledge  the  actual  giving  of  coin  at  some  future  time. 
A  Government,  however,  when  it  becomes  an  issuer  of 
notes,  invariably (  enacts  .a  law  making  them  legal 
tender,  whereas  banks  do  not  obtain  and  do  not  require 


PAPER  CURRENCY.      ^  45 

this  privilege  to  enable  their  notes  to  circulate* 
reason  of  the  difference  is-  clear.  A  bank  can 
pelled  by  a  note-holder  to  give  the  money  stipulated  on 
pain  of  bankruptcy  ;  the  assurance  that  a  Government 
will  always  pay  is  by  no  means  so  certain.  There  are 
no  means  for  compelling  a  Government  to  pay  money, 
if  it  chooses  to  say  that  it  has  none,  and  it  would  find 
great  difficulty,  from  the  knowledge  of  this  fact,  in  per 
suading  contractors  to  take  its  notes  in  payment.  So 
it  has  recourse  for  help  to  this  privilege  of  legal 
tender  conferred  by  law  on  its  notes.  A  contractor 
who  is  assured  that  his  own  creditors  must  take  these 
notes  in  payment  becomes  willing  to  give  his  goods 
to  the  Government  in  exchange  for  them ;  he  can  pass 
them  on  to  others,  and  that  is  everything. 

But  there  is  a  very  solid  and  serious  distinction 
between  a  private  issuer  of  notes  and  a  Government. 
The  property  given  to  a  solvent  banker  for  his  notes  is 
not  lost  to  the  nation  ;  the  banker  lends  it,  if  he  is  a 
good  banker,  to  persons  who  do  not  waste  or  destroy  it, 
but  employ  it  as  capital.  The  public  pays  exactly  the 
same  for  the  tool  of  exchange,  whether  it  procures  it 
from  a  miner  or  from  a  bank.  But  when  the  wealth  is 
given  to  a  miner,  he  consumes  it ;  the  nation  retains,  no 
doubt,  an  equal  value  of  gold,  but  it  is  lost  as  capital 
beyond  the  work  of  exchanging  in  buying  and  ply 
ing.  Its  services  as  a  tool  are  all  that  the  nation 
gets  from  it.  The  same  services  are  procured  from  the 


46     GOVERNMENT  SPENDS  WHAT  IT  GETS  FOR  PAPER. 

bank-note,  only  it  costs  but  sixpence  to  the  banker  and 
to  the  nation.  Compared  with  a  £5  note,  wealth  to  the 
extent  of  £4,  193  6d,  which  must  have  been  sent  away 
to  a  foreign  miner,  now  remains  in  England,  and  if  the 
banker  does  not  mismanage  his  business,  is  set  to  work 
as  a  part  of  the  wealth-producing  capital  of  the  nation. 
But  Government  issues  are  directly  united  with  con 
sumption  ;  the  Government  spends  and  consumes  what 
it  procures  with  its  notes ;  it  is  not  employed  as  capital. 
No  Government  which  acquired  the  whole  paper  circula 
tion  of  a  country  could  be  trusted  for  not  consuming  what 
it  procured  with  it,  whereas  in  England  every  pound  of 
the  Bank  of  England  issues,  except  what  the  law  com 
mands  to  be  kept  in  gold  as  reserve,  is  capital  at  work 
in  the  creation  of  wealth.  This  capital  is  given  to  the 
Bank  by  the  holders  of  its  bank-notes,  and  the  Bank 
places  it  in  the  hands  of  men  who  employ  it  and  repro 
duce  it  in  goods  made. 

To  stand  on  a  level  with  coin  as  a  tool  of  exchange 
or  currency,  the  debt  expressed  by  the  banker  must  be 
as  valuable  as  the  coin.  With  metallic  money  the 
public  possesses  certain  knowledge — it  holds  the  pre 
cious  metal  in  its  hands.  How  is  it  to  feel  equally 
assured  as  to  paper  money  ?  How  is  it  to  acquire  a 
well-warranted  confidence  that  the  debt  remains  good, 
that  the  issuing  banker  can  always  pay  for  it,  because 
he  is  as  perfectly  solvent  ?  By  convertibility,  that  is, 
not  only  by  the  right  to  demand  coin  for  the  note  at 


PAPER  CURRENCY.  47 

any  moment,  but  also  by  the  fact  itself  that  the  coin 
demanded  is  actually  given.  How,  then,  is  convertibil 
ity  to  be  secured  ?  This  leads  to  the  farther  question, 
who  ought  to  be  the  issuers  of  the  paper  circulation  of  a 
country- — the  Government  or  a  bank  or  banks  ? 

Wi:h  regard  to  the  respective  fitnesses  of  each  of 
these  two  issuers  for  the  function,  very  diverse  opinions 
are  maintained.  >  On  the  side  of  the  bankers,  it  is  urged 
that  the  (£>ank-note — as  its  name  indicates — is  histori 
cally  the  offspring  of  banks.  In  substance  it  is  the 
same  as  the  cheque,  an  order  on  or  an  undertaking  by 
a  bank  to  pay  a  sum  of  money.  Further,  it  is  an 
/ordinary  commercial  transaction^) and  has  existed  as 
such  in  many  countries,  and  the  State  is  not  warranted 
in  invading  the  domain  of  private  life.  The  note 
circulation  of  Scotland  is  appealed  to  as  a  proof  of  the 
excellence  which  private  issues  may  attain  to,  bank-notes 
being  actually  preferred  to  sovereigns  by  the  Scotch — 
and  where  is  a  more  acute  and  intelligent  population  to 
be  found  than  the  Scotch  ? 

The  advocates  of  the(issue  by  Government  take  their 
stand  on  prerogative.  The  I  function,  they  urge,  is 
essentially  a  public  act-rit  covers  the  whole  nation/) 
Th^profit  derived  from  so  national  an  operation  ought 
fitly  to  be  reaped  by  the  public,  j  Omitting  existing 
issuers,  no  injury  is  done  to  a  particular  individual  by 
appropriating  the  issues  to  the  State)  The  Parliament 
of  England,  they  point  out,  acted  on  this  principle  in 


48  WHO  OUGHT  TO  ISSUE  BANK-NOTES  ? 

1844;  it  laid  the  foundation  of  the  ultimate  extinction 
of  private  issues,  and  erected  a  Government  offi:e  as 
the  sold  distributor  of  bank-notes  in  the  future. 

It  seems  to  me  that  if  the  issuing  of  notes  were  com 
menced  for  the  first  time  it  would  be  difficult  5b  resist 
the  argument  that  the  profits  of  a  function  which 
embraces  the  whole  people  naturally  belongs  to  the 
people  itself.  Bank  issues  are  local.  A  currency  com 
prehending  the  whole  community  is  of  a  higher  order, 
so  that  even  if  the  agency  of  banks  were  called  for, 
some  portion  of  the  profits  might  justly  be  reserved  for 
the  State.  The  bank's  right  to  have  its  cheques  undis 
turbed  is  indisputable — they  are  personal  relations  of 
individuals  to  it.  The  solution  of  the  question,  how 
ever,  will  in  almost  all  cases  be  determined  by  the  cir 
cumstances  of  the  day  and  place  ;  local  arguments  may 
at  any  time  turn  the  scale  in  favour  of  either  party.  In 
England  private  banks  had  proved  themselves  to  be 
bad  and  unsafe  issuers  of  public  currency.  The  Act  of 
1844  wisely  and  justly  substituted  for  them  issues  con 
trolled  by  the  State.  In  Scotland  the  private  issues 
have  displayed  on  trial  unchallengeable  quality;  few 
persons,  not  doctrinaires,  would  dream  of  suppressing 
them  in  favour  of  Government  notes,  except  under 
some  call  of  necessity.  In  America  there  is  entire 
liberty  of  action.  Government  and  banks  issue  to 
gether.  Hence  when  a  final  arrangement  is  made  for 
rendering  all  the  notes  convertible,  some  principle  must 


PAPER  CURRENCY.  49 

be  found  and  carried  out.     It   is   a   matter  of  great 
gravity. 

( Direct  issue  by  a  Government  appears  to  me  to  be 
an  objectionable  machinery  for  the  management  of  a 
paper  currency.  It  fails  on  the  capital  point  of  provid 
ing  thoroughly  trustworthy  security  for  convertibility. 
A  Government  cannot  be  declared  legally  insolvent,  j 
A  President  of  the  United  States  or  a  Prime  Minister 
of  England  cannot  be  locked  up  in  prison  if  multitudes 
of  their  fellow-countrymen  are  reduced  to  ruin  by  the 
bankruptcy  of  the  State.  "  No  more  gold  in  the  till," 
would  be  an  answer  to  the  presenter  of  a  note  which 
would  place  the  Bank  of  England  in  the  Insolvency 
Court ;  what  harm  would  it  do  to  a  single  Government 
official  employed  in  managing  the  paper  currency  ? 
Hence  responsibility  for  maintaining  convertibility 
cannot  be  fastened  on  political  rulers  as  it  can  on  a 
private  company.  They  are  not  liable  in  person  or  in 
purse.  They  can  always  plead  for  refusing  to  pay  gold, 
"The  State  acknowledges  the  debt,  and  you  will  be 
paid  at  last,  but  you  must  wait  a  while  now."  But 
what  does  this  mean  ?  That  the  national  currency  is 
instantly  corrupted,  that  all  kinds  of  value  will  soon  be 
put  upon  the  bank-notes,  that  the  essential  function  of 
currency  to  furnish  a  guarantee  to  the  man  who 
receives  it — that  he  will  be  able  to  buy  as  valuable 
goods  with  it  as  those  he  sold — will  be  lost,  that  every 
one  will  be  in  perplexity  as  to  the  worth  of  the  paper 


5O  A  BANK  THE  BEST  ISSUER. 

money  which  he  puts  down  in  his  account-book  when  he 
sells  on  credit,  and  then  the  whole  trade  of  the  country 
becomes  poisoned  with  uncertainty  and  disorder.  Poli 
ticians,  and  indeed  tax-payers  also,  are  not  to  be  trusted 
for  being  proof  against  the  temptation  of  being  indifferent 
about  a  deterioration  of  the  currency,  if  only  it  helps 
them  in  an  hour  of  difficulty.  A  purely  metallic  cur 
rency  would  furnish  them  with  no  resource ;  but  to  get 
property  with  paper  is  easy  and  pleasant  for  a  Govern 
ment,  and  they  can  always  plead  necessity  at  pleasure. 
The  conclusion  is  that  a  Government  is  a  bad  direct 
issuer  of  paper  currency,  and  every  nation  would  do 
well  not  to  fall  into  such  a  snare. 

But  a  Government  may  employ  indirect  agency  and 
demand  a  share  in  the  profit  of  a  function  which  no  one 
can  distinctly  claim  as  his  own,  and  which  naturally 
falls  to  the  State  as  supreme  over  all  public  actions^ 
Banks  are  the  only  institutions  with  whom  it  can  nego 
tiate  for  the  performance  of  this  service  ;  for  banks  alone 
can  deal  with  the  funds  received  in  exchange  for  the 
bank-notes  and  employ  them.  By  such  an  arrangement 
the  nation  obtains  the  full  benefit  of  the  difference  of 
cost  between  the  two  tools,  gold  and  paper.  The  wealth 
saved  by  using  the  paper  tool  of  exchange,  by  means  of 
a  bank,  is  retained  in  the  country  as  capital,  reproduc 
ing  itself  incessantly  in  the  products  it  creates.  Here  we 
discover  how  and  within  what  limit  the  issues  of  conver 
tible  bank-notes  can  benefit  trade,  and  find  means  for 


PAPER  CURRENCY.  5  I 

merchants  wherewith  to  carry  out  their  operations.  The 
fund  which  paper  issues  supply  for  this  purpose  is  the  pay 
ment  made  by  the  public  when  it  purchases  these  notes. 
I  say  purchases,  for  bank-notes  are  as  much  bought 
and  paid  for  by  the  public  as  sugar  or  corn,  or  as  the 
gold  which,  but  for  the  notes,  would  have  been  purchased 
from  the  miners.  An  issuing  bank,  unless  it  is  faithless 
to  the  law  of  its  business,  advances  these  funds  to  cus 
tomers  on  loan,  or — far  more  commonly  and  usefully — on 
the  discount  of  commercial  bills.  With  the  supply  of 
purchasing  power  thus  obtained  on  discount  the  mer 
chant  can  buy,  and  those  who  sell  are  benefited.  This, 
in  very  truth,  is  to  employ  the  property  which  would 
have  gone  to  purchase  gold  currency,  but  which  is  saved 
to  the  nation  by  the  substitution  of  paper,  as  capital  in 
the  true  economical  sense  of  the  term.  It  is  wealth  em 
ployed  in  producing  other  wealth.  But  this  advantage 
has  a  limit :  it  cannot  extend  beyond  the  fund  which  the 
public  by  buying  the  bank-notes  places  at  the  disposal 
of  the  issuing  bankers.  Those  amongst  the  public  who 
use  bank-notes  paid  to  the  bankers  as  much  as  they 
would  have  paid  to  the  miners  ;  the  notes  and  the  coin 
are  both  bought  alike ;  but  the  property  given  for  the 
notes,  through  the  agency  of  the  bankers,  is  placed  in 
hands  which  apply  it  to  industry  as  capital,  and  thus 
supports  and  enriches  the  nation,  in  addition  to  the 
currency  service  rendered  by  the  paper  substitutes. 
The  question  now  arises,  Is  a  bank  entitled  to  issue 


52       OUGHT  THE  STATE  TO  TAKE  SECURITY  FOR 

bank-notes  without  control  under  the  sole  liability  of 
paying  them  on  demand,  or  is  the  State  summoned  to 
require  security  that  the  means  of  redemption  shall  be 
forthcoming  when  demanded  ?  In  the  case  of  a  bill  or 
any  other  debt  the  State  does  not  interfere  with  perfect 
freedom  of  contract.  It  does  not  say  to  a  debtor  that 
when  he  borrows  he  must  pledge  some  definite  property 
which  will  render  the  creditor  safe.  Is  not  the  liability 
of  the  banker's  fortune  to  its  utmost  extent  sufficient 
also  for  his  bank-note  ?  It  was  not  long  ago  the  uni 
versal  practice  in  England  to  emit  bank-notes  on  this 
responsibility  alone.  The  circulation  of  English  country 
bank-notes,  as  well  as  those  of  Scotland  and  Ireland, 
rests  on  no  other  foundation.  No  one  is  bound  to  take 
the  country  banker's  or  the  Scotchman's  bank-notes;  but 
if  he  does,  the  law  gives  him  no  other  help  than  what  it 
affords  to  every  other  debt.  It  will  compel  the  debtor  to 
pay  with  his  property;  but  it  takes  no  care  that  he  shall 
have  any  property  at  all.  Upon  what  principle,  then, 
should  an  exception  be  made  for  bank-notes  ?  Why 
should  it  provide  for  them  property  which  is  certain  to  pay 
them  ?  On  a  principle  upon  which  State  intervention  is 
constantly  exercised  and  justified.  It  is  this  :  that  when 
the  public  is  practically  incompetent  to  protect  itself, 
the  State  is  warranted  in  coming  to  its  aid  with  special 
legislation.  Thus,  in  the  manufacture  of  gun-barrels,  in 
the  moving  and  storing  of  gun-powder,  in  the  manage 
ment  of  passenger  vessels,  the  minting  of  coin,  the  load- 


PAYMENT  OF  PAPER  CURRENCY?        53 

ing  of  ships,  and  other  like  matters,  the  law  steps  in 
with  restrictions,  sometimes  with  total  prohibitions,  and 
no  one  contests  the  propriety  of  its  action.  The  issuing 
of  bank-notes  falls  under  this  principle:  the  public  is 
incompetent  to  enforce  the  safety  which  is  necessary  for 
the  general  good.  The  law  gives  no  such  help  to  a 
man  who  deposits  his  means  with  a  banker,  or  accepts 
a  bill  or  a  cheque  in  payment.  These  are  voluntary 
acts  ;  the  receiver  or  depositor  knows  perfectly  well  that 
he  is  bound  to  consider  the  honesty  and  the  security 
of  the  man  whom  he  trusts.  It  is  otherwise  with  a 
shopkeeper  who  is  offered  the  bank-notes  which  circulate 
all  over  the  town,  and  still  more  so,  with  the  person 
to  whom  a  small  bank-note  is  paid.  He  is  under  a 
semi-compulsion  to  take  them.  If  the  shopkeeper  gives 
trouble  by  declining  to  take  the  ordinary  currency,  he 
runs  the  risk  of  losing  his  customer,  who  turns  away  to 
another  shop  or  store.  Bank-notes  circulate  largely 
among  the  poor  and  uneducated,  and  when  the  bank 
breaks,  the  loss  is  severe  and  distressing.  These  facts 
supply  ample  warrant  to  the  State  to  require  of  issuing 
bankers,  not  only  that  they  shall  pay  their  debts  to  the 
utmost  extent  of  their  fortunes,  as  any  other  person, 
but  further  that  they  shall  lodge  such  security  as  shall 
always  provide  for  the  payment  of  the  debt  acknow 
ledged  on  the  note. 

A  guarantee  for  the  solvency  of  the  notes  may  be 
obtained  in  various  ways,  but  none  seems  so  natural  and 


54      HOW  MANY  BANK-NOTES  WILL  CIRCULATE? 

|  so  simple  as  a  deposit  of  Government  securities  with 
\spme  office  of  the  State.  It  combines  two  advantages 
— safety,  and  a  natural  and  fitting  profit  for  the  banker 
from  the  interest  accruing  on  the  bonds  or  stock.  The 
old  Exchequer  Bill  of  the  English  Government  was  an 
excellent  specimen  of  this  kind  of  security.  It  could 
always  be  paid  in  for  taxes,  bore  a  daily  interest,  and 
was  thoroughly  trusted,  and  with  reason,  by  the  whole 
community.  England  has  dealt  with  the  problem  on 
the  principle  here  laid  down  in  the  Bank  Charter  Act 
of  1844;  but  as  this  statute  will  require  special  discus 
sion,  it  is  best  not  to  break  ground  upon  it  in  this  place. 
And  now  we  reach  the  very  critical  question  —  In 
what  numbers  will  convertible  bank-notes  circulate  ? 
It  is  the  crucial  question  to  test  the  soundness  of  every 
theory  of  currency.  All  who  talk  and  write  on  currency 
are  bound  to  push  this  question  home  to  their  minds, 
and  not  be  content  till  they  have  framed  for  themselves 
a  definite  and  intelligible  answer. 

Mr  Tooke  discerned  the  true  answer ;  Mr  Mill,  with 
some  little  wavering,  saw  the  light ;  but  the  general 
literature  on  money  matters  profoundly  ignores  the 
fact.  The  answer  is  the  same  as  that  which  has  already 
been  given  to  the  parallel  question  respecting  coin.  So 
many  bank-notes  as  the  public  has  a  distinct  want  for  will 
circulate,  and  no  more.  It  is  the  universal  law  of  all  com 
modities  in  use,  the  law  of  demand  and  supply.  Neither 
bankers,  nor  Parliament,  nor  suspensions  of  the  Bank 


PAPER  CURRENCY.  55 

Act,  nor  the  need  of  borrowers,  but  the  wants  and  con 
venience  of  the  public,  its  willingness  to  hold  bank-notes, 
the  number  and  amount  of  the  specific  payments  which 
bank-notes  accomplish,  with  a  certain  spare  stock  as  for 
all  articles  in  use,  can  determine  how  many  convertible 
bank-notes  will  remain  in  circulation,  and  not  be  returned 
upon  the  bankers  for  payment.  This  is  the  truth  of 
truths  for  a  convertible  paper  currency.  This  is  so 
obvious  a  consequence  of  the  fact  that  bank-notes  are 
tools,  and  that  their  quantity  will  be  regulated  by  the 
specific  work  which  there  is  for  them  to  do,  that  it 
almost  seems  a  platitude  to  proclaim  it ;  yet  the  whole 
array  of  traders  and  writers  on  money  refuse  to  see  this 
patent  truth.  They  all  believe,  for  instance,  that  to  set 
free  the  issue  of  Bank  of  England  notes  by  the  Suspen 
sion  of  the  Act  of  1844  enables  any  amount  of  these 
notes  to  be  issued  at  pleasure.  They  refuse  to  perceive 
and  to  learn. 

An  inflated  circulation  of  bank-notes  payable  on  de 
mand  is  a  pure  absurdity,  nothing  better  than  nonsense. 
It  would  be  just  as  sensible  to  speak  of  an  inflated  cir 
culation  of  hats.  It  is  easy  for  a  hatter  to  make  more 
hats  than  can  be  sold  ;  but  where  would  be  the  inflation 
in  that  case  ?  In  the  number  of  hats  circulating  about 
the  town  ? — in  each  man  having  a  dozen  hats  in  his 
house  ?  The  very  question  is  puerile  ;  there  would  be 
an  inflation  of  hats,  but  it  would  be  found  in  the  shops 
of  the  hatters,  not  in  the  circulation  of  hats.  Let  any 


56    CONVERTIBLE  BANK-NOTES  CANNOT  BE  INFLATED. 

one  ask  himself  how  he  can  inflate  his  own  use  of  bank 
notes  ?  Why  should  any  one  keep  bank-notes  which 
he  cannot  employ  in  a  desk  or  till  ?  He  can  buy  with 
them,  is  the  universal  answer ;  but  if  he  has  already 
machinery  enough  with  cheques,  bills,  and  the  ordinary 
supply  of  notes  suited  to  his  wants  for  purchasing,  how 
can  he  need  more  ?  True,  it  is  replied ;  but  a  banker 
can  lend  them  to  a  man  who  has  no  money,  and  with 
them  he  can  buy  or  meet  his  engagements  in  the  day 
of  difficulty.  That  is  so,  no  doubt ;  but  unhappily  for 
the  banker,  the  man  to  whom  his  borrower  pays  them 
has  already  as  many  notes  as  his  business  requires ;  the 
excess  now  pouring  in  upon  him  he  either  himself,  or 
indirectly  through  his  banker,  sends  in  to  the  issuing 
bank,  which  finds  to  its  cost  that  it  has  lent,  not  bank 
notes  which  remain  out  in  circulation,  but  the  funds 
wherewith  it  has  to  redeem  these  surplus  lent  notes,  which 
instantly  come  back  upon  it  for  payment.  And  so,  in 
actual  fact,  in  the  time  of  crisis,  borrowers  do  not  take 
away  their  loans  in  bank-notes ;  they  receive  authority 
from  the  lending  bank  to  draw  cheques  upon  it,  which. are 
settled  at  the  Clearing  House  without  any  cash  passing. 
The  Bank  of  England  never  has  been  so  absurd  as  to 
say  to  a  distressed  borrower,  "You  shall  have  assistance, 
only  you  must  take  it  out  in  notes;"  yet  this  would  have 
been  its  language  if  it  had  believed  that  it  could  increase 
its  means  of  lending  by  getting  additional  bank-notes  out 
into  circulation.  It  knows  perfectly  well  that  the  notes 


PAPER  CURRENCY.  57 

would  return  upon  it  in  a  few  hours  for  payment. 
Those  who  had  received  the  bank-notes  from  the 
persons  to  whom  the  Bank  had  lent  them  would  at 
once  place  them  to  the  credit  of  their  accounts,  either 
directly  with  the  Bank  of  England,  or  with  their  own 
bankers,  who  would  pass  them  on,  as  unwanted,  to  their 
credit  with  the  Bank.  They  then  would  draw  cheques 
on  the  Bank  to  meet  purchases  or  to  make  payments ; 
and  the  final  result  would  be  that  the  Bank  had  got 
back  the  bank-notes,  but  would  be  obliged  to  face  these 
cheques  out  of  its  other  resources.  The  forcing  the 
borrowers  to  take  the  loan  in  bank-notes  would  have 
done  the  Bank  no  good  ;  it  would  have  made  a  simple 
loan  precisely  as  if  these  bank-notes  had  never  existed. 
No  issuer  of  notes  can  by  any  possibility  add  to  his 
resources  and  powers  of  lending  by  means  of  con 
vertible  notes,  except  to  the  extent  that  the  public  will 
keep  them  in  circulation,  and  will  not  present  them  to 
him  for  payment. 

An  elaborate  circular  of  a  Chamber  of  Commerce  lays 
down  that  "  to  restrict  the  supply  of  bank-notes  is  to  stifle 
commerce.  A  contracted  circulation  raises  prices.  A 
limitation  on  the  issue  of  notes  raises  the  rate  of  interest 
charged  by  bankers  on  discounting  merchants'  bills." 
These  are  the  universal  ideas  of  traders  ;  but  where  do 
they  get  these  fine  principles  from  ?  Not  from  science, 
nor  from  analysis  of  the  facts  which  they  claim,  as  prac 
tical  men,  peculiarly  to  understand ;  they  must  be 


58     THE  HOLDERS  OF  BANK-NOTES  ARE  THE  LENDERS. 

primitive  truths,  dawning  on  the  mercantile  mind  by 
intuition,  and  shining  by  their  own  transparent  light. 
There  are  many  assumptions  involved  in  this  language, 
and  much  ignorance  too.  How  can  the  want  of  bank 
notes  stifle  commerce  ?  Commerce  is  the  exchanging  of 
goods ;  the  bank-note  is  one  of  its  tools ;  but  it  gives  no 
increase  of  wealth  nor  of  buying  power  ;  it  is  but  a  piece 
of  paper ;  what  it  does  is  to  give  to  the  banker  buying 
power  which  he  can  lend  to  a  borrower.  But  where  does 
the  banker  get  this  buying  power  from  ?  Not  from  his 
own  resources,  certainly ;  he  obtains  it  from  the  public. 
The  real  nature  of  the  act  of  issuing  notes  is  that 
the  banker  has  first  obtained  property  or  the  command 
of  property,  from  a  part  of  the  public,  his  depositors. 
He  then  repays  them  with  the  notes,  retaining  the 
property ;  in  other  words,  he  gives  in  payment  of  the 
deposits  another  debt  due  by  him  to  the  holders  of  the 
notes — he  pays  a  debt  with  another  debt — and  it  is  the 
holder  of  the  notes  who  enables  the  banker  to  satisfy 
the  demand  of  his  depositor,  and  yet  retain  the  pro 
perty.  The  holder  of  the  notes  is  the  true  lender  through 
the  bank  to  the  man  who  obtains  assistance,  who  borrows 
from  the  bank.  But  there  is  no  increase  of  buying 
power  in  all  this,  not  a  particle  of  wealth  or  of  lending 
power  is  created  by  it.  Bank-notes  are  but  intermediate 
agency.  Their  action  consists  in  making  the  holder  of 
the  notes  lend  his  spare  property,  not  himself  directly, 
but  through  the  agency  of  a  bank,  to  a  man  who  wishes 


PAPER  CURRENCY.  59 

to  borrow  and  to  use  it.  Suppress  the  notes,  the  wealth 
of  England  will  remain  the  same.  Those  who  paid  for 
"them  would  have  the  same  wealth  at  their  disposal,  the 
same  disposition  to  lend,  only  the  lending  would  be  made 
through  cheques  instead  of  bank-notes,  or  by  direct  loan 
to  borrowers.  Commerce  is  not  stifled  or  vitalised  by 
notes ;  it  only  gets  a  convenient  machine  for  exchanging 
wealth,  but  no  increase  of  wealth  except  so  far  as  coin 
would  have  had  to  be  bought  from  a  foreign  miner. 

We  are  next  told  that  a  contracted  circulation  raises 
prices ;  upon  what  evidence  or  principle  does  this 
favourite  dogma  rest?  Bank-notes  really  convertible 
are  identical  in  value  with  gold  ;  the  slightest  difference 
of  value  between  them  would  instantly  bring  the  bank 
notes  to  the  issuer  for  gold.  Nothing  which  happens  to 
convertible  notes  can  affect  their  value ;  the  value  of  the 
gold  must  rise  or  fall  before  the  notes  can  be  touched. 
In  fact,  bank-notes  may  be  regarded  as  tickets  entitling 
the  holder  to  obtain  the  gold  out  of  the  vault  when  he 
likes.  An  issue  of  notes  smaller  than  what  the  public 
could  employ  and  keep  out  in  circulation  means  only  an 
inconvenience  really  trifling ;  cheques  and  bills  would 
be  more  freely  used,  and  that  would  be  the  whole  of  the 
matter.  A  little  more  gold  coin  would  perhaps  be  em 
ployed  ;  but  the  quantity  would  be  trifling,  and  the  value 
of  gold  is  determined,  not  in  England,  but  in  Europe 
generally,  or  rather  over  the  whole  world. 

And  then  "  to  limit  bank-notes  is  to  raise  the  rate  of 


60  EFFECT  OF  NOTES  ON  CAPITAL. 

interest."  But  how  ?  No  doubt  a  banker  by  issuing 
notes  procures  more  to  lend  to  his  customers ;  he  can 
grant  larger  discount  to  those  who  bring  him  commer 
cial  bills.  But  the  funds  which  he  thus  obtains  to  lend 
he  acquires  from  the  public.  His  notes  enable  him  to 
lend  more,  but  what  he  lends  the  public  provides ;  there 
is  no  increase  of  things  to  lend.  The  rate  of  interest  on 
loans  and  discounts  depends  on  the  spare  capital  which 
owners  all  over  the  country  cannot  employ  themselves, 
but  are  willing  to  lend  to  others  who  can  make  use  of  it 
in  trade  and  industry.  A  diminution  of  bank-notes  does 
not  make  this  spare  capital  smaller ;  it  only  places  less 
of  it  at  the  disposal  of  the  issuing  banker.  Bank-notes 
are  but  paper — paper  tools — not  the  property  or  capital 
itself.  Interest  does  not  depend  on  more  or  fewer  tools 
of  paper  being  used,  but  on  wealth  available  for  lending. 
Banking,  with  all  its  machinery  of  bank-notes,  cheques, 
bills,  and  the  like,  is  only  intermediate  agency;  the  only 
thing  it  does  is — not  to  create  property,  but  simply  to 
place  it  in  different  hands.  There  is  only  one  case 
in'  which  an  issue  of  bank-notes  might  tell  on  interest, 
and  that  is  in  a  particular  spot,  at  a  special  time,  and 
under  stated  circumstances,  in  a  panic  in  the  money 
market.  Whether  such  an  issue  is  possible,  and  if  so, 
under  what  conditions,  will  be  discussed  in  the  next 
chapter. 


PAPER  CURRENCY.  6 1 

Section  II. —  The  Bank  Charter  Act  of  1844. 

THIS  seems  to  be  the  fitting  place  for  explaining  the 
manner  in  which  bank-notes  are  issued  in  England,  more 
especially  under  the  Statute  of  1844,  which  re-organised 
the  issues  of  the  Bank  of  England,  and  made  provision 
for  the  ultimate  condition  of  the  paper  currency  of 
England. 

Up  to  the  passing  of  this  Act,  it  was  open  to  any  bank 
or  private  person  to  put  forth  bank-notes.  One  condi 
tion  only  was  imposed  as  a  guarantee  of  their  value. 
They  were  required  to  be  convertible,  payable  on  de 
mand.  Not  to  pay  a  bank-note  on  presentation  was 
an  act  of  bankruptcy,  and  the  issuer  passed  at  once 
under  the  laws  of  insolvency. 

There  probably  has  never  existed  a  law  whose  mean 
ing  has  been  so  vehemently  and  incessantly  disputed, 
and  is  disputed  still,  as  the  Bank  Charter  Act  of  1844. 
No  one  has  accused  it  of  obscurity  of  language :  what 
it  prescribes  is  most  simple,  easy  to  be  understood,  and 
equally  easy  of  execution.  No  one  raises  a  question  as 
to  what  is  legal,  and  what  not,  under  its  provisions :  yet 
the  significance  of  the  Statute,  what  its  enactments 
effect  or  do  not  effect,  whether  it  is  a  revolution  or  a 
beneficial  law,  are  matters  of  the  most  differing  and 
most  bitter  interpretation.  It  is  regarded  as  the 
destroyer  or  the  saviour  of  trade. 

In  examining  the  nature  of  this  Statute,  let  us  pursue 


62       THE  BANK  OF  ENGLAND  DOES  NOT  ISSUE  NOTES. 

the  method  adopted  by  all  judges  in  considering  an  Act 
of  Parliament  in  a  Court  of  Law.  They  take  no  notice 
of  speeches  delivered  in  Parliament  by  its  authors. 
What  they  aimed  at,  what  they  supposed  the  measure 
they  advocated  to  enjoin,  counts  for  nothing,  if  the  lan 
guage  of  the  law  is  clear.  The  Court  looks  at  what  the 
Statute  says,  and  at  nothing  else :  from  that  the  Court 
learns  what  it  is.  We  will  follow  this  path,  examining 
each  point  that  presents  itself. 

1.  The  Act  divides  the  Bank  of  England  into  two 
departments,  one  the  Banking  Department,  the  other 
the  Issue  Department.     The  latter  is  exclusively  con 
cerned  with  the  issuing   of  notes.  .  That  operation  is 
carried  out  under  fixed  rules  laid  down  in  the  Statute — 
and  the  vital  point  to  observe  here  is  that  the  corpora 
tion  called  the  Bank  of  England  has  no  voice,  discre 
tion,  or  control  over  the  issues.     In  the  Issue  Depart 
ment  the  Bank  Directors  have  no  more  authority  or 
right  to  speak  or  act  than  any  other  person  in  the  king 
dom.      The    Banking    Department    is    the    Bank    of 
England,  pure  and  simple,  as  private  a  bank  as  any 
other  bank  in  the  country.     As  such,  as  a  private  bank, 
it  possesses  two  advantages  :  a  very  big  customer  in  the 
Government  account,  and  a  special  benefit  from  the 
bank-notes  conferred  on  it  by  the  law. 

2.  The  Act  limits  the  quantity  of  bank-notes  issued 
by  private  banks  in  the  nation  to  the  quantity  existing 
at  the  time  when  the  Act  became  law.     If  any  of  these 


PAPER  CURRENCY.  63 

private  issuers  cease  to  issue,  the  bank-notes  assigned  to 
them  lapse,  and  the  amount  of  the  whole  private  issue 
becomes  permanently  reduced  by  nearly  that  amount. 

3.  The  Bank  of  England,  the  private  bank  so  called, 
is  authorised  to  receive  from  the  Issue  Department  four 
teen  millions  of  notes,  with  a  certain  proportion  of  the 
lapsed  private  issues,  as  they  lapse.   The  quantity  stands 
now  at  about  fifteen  millions.      These  bank-notes  the 
Bank  receives  from  the  Issue  Department — (which,  in 
reality,  is  an  office  of  the  State) — on  the  condition  that 
it  shall  give  gold  for  them  to  the  public,  whenever  they 
are  presented  for  payment.     Of  course  this  fact  may  be 
regarded  as  meaning  that  the  Bank  of  England  is  a 
direct  issuer  of  notes  to  the  extent  of  fifteen  millions, 
but  it  is  far  simpler  and  truer  to  look  upon  the  Bank  as 
a  receiver,  for  special  reasons,  of  so  many  notes  from 
the  sole  issuer,  the  office  of  the  State  called  the  Issue 
Department.    The  Bank  is  subject  to  the  further  condi 
tion  that  it  shall  invest  these  fifteen  millions  in  securities 
on  which  it  receives  the  interest,     They  are  invested  at 
three  per  cent. 

4.  Bank  of  England  notes  are  declared  to  be  legal 
tender   everywhere   except   at   the   Bank   itself.      The 
Bank  cannot  pay  its  debts  with  bank-notes,  as  being 
legal  tender.     Any  of  its  creditors  may  decline  them. 

5.  Every  note  is  payable  at  the  premises  of  the  Bank 
of  England — some   out   of  its   private   resources,   the 
remainder  at  the  State  office,  called  the  Issue  Depart- 


64  THE  SIGNIFICANCE  OF  THE  BANK  ACT. 

ment.  The  law  further  enacts  that  all  the  notes  issued 
by  the  Issue  Department  beyond  the  fifteen  millions, 
shall  be  covered  for  this  payment  by  a  deposit  of 
gold  kept  in  the  Department.  The  whole  issue  thus 
consists  of  two  parts  :  one,  now  fifteen  millions,  assigned 
to  the  Bank  of  England,  and  payable  by  it,  the  re 
mainder  put  forth  by  the  Issue  Department  in  exchange 
for  gold  given  to  it  by  the  public,  and  kept  permanently 
in  the  vault  to  guarantee  convertibility. 

Such  are  the  main  provisions  of  this  much-debated 
statute — it  remains  now  to  ascertain  their  practical 
significance. 

1.  In  the  first  place  it  is  obvious  that  it  sentences  the 
private  issues  in  England  to  extinction  by  a  process  of 
greater  or  less  duration.     Many  causes  are  ever  at  work 
causing    private    banks   to   cease   issuing ;    sometimes 
leading  partners  die,  and  the  bank  comes  to  an  end, 
or,  as  was  the  case  recently  with  the  National  Provincial 
Bank  of  England,  a  bank  voluntarily  abandons  country 
issues  in  order  to  acquire  the  right  of  carrying  on  bank 
ing  in  London,  a  privilege  refused  by  law  to  joint-stock 
banks  issuing  bank-notes.     It  is  obviously  the  intention 
of  the  statute  that  ultimately  Bank  of  England  notes 
shall   be  the  only  paper  currency  of  England.      This 
intention  is  further  marked   by  the  privilege  of  legal 
tender  (save  always  at  the  Bank   itself)   granted  ex 
clusively  to  the  Bank  of  England. 

2.  Ultimately  the  bank-notes,  uncovered  by  an  actual 


PAPER  CURRENCY.  65 

lodgment  of  gold  to  secure  convertibility,  will  be  limited 
to  the  amount  which  will  accrue  to  the  Bank  of  England 
when  all  the  private  issues  shall  have  disappeared,  but 
the  solvency  and  convertibility  of  these  particular  notes 
will  be  secured  by  the  investment  in  securities  to  their 
amount  required  by  the  Act. 

Many  suppose  that  the  debt  of  fourteen  millions  due  by 
the  Government  to  the  Bank — which  we  may  presume 
was  the  reason  why  the  line  between  the  uncovered  and 
the  covered  issues  was  drawn  at  fourteen  millions — is 
specially  appropriated  as  a  security  for  payment  to  the 
uncovered  issues  emitted  by  the  bank  on  its  own  liability, 
so  that  in  the  event  of  the  bank's  insolvency  there  will 
be  a  special  asset  of  that  amount  for  the  uncovered 
notes ;  but  it  is  extremely  doubtful  whether  this  view  is 
sound  in  law.  The  point  is  not  decided,  nor  is  it  likely 
to  be. 

3.  Uncovered  notes  are  restricted  in  amount.  They 
cannot  exceed  fifteen  millions  now.  Any  quantity  of  notes 
above  this  amount  may  be  obtained  from  the  Issue  Depart 
ment,  but  they  must  be  purchased  with  gold,  and  that  gold 
kept  locked  up  in  the  office.  Absolute  restriction,  there 
fore,  there  is  none — the  public  may  have  as  many  notes 
as  it  pleases ;  but  it  must  pay  with  gold,  for  all  above 
fifteen  millions.  No  portion  of  the  whole  issue  is  available 
for  lending  either  on  discount  to  traders,  or  by  loans  and 
advances.  What  the  bank  receives  from  the  public, 
the  fifteen  millions,  must  be  invested  in  securities  ;  the 


66       MISCHIEVOUS  CONFUSION  OF  TWO  RESERVES. 

gold  given  for  all  above  is  stored  away  in  the  vault  of 
the  Issue  Department. 

4.  The  gold  stored  and  kept  in  the  Government  Office, 
the  Issue  Department,  in  no  sense  whatever  belongs  to 
the  Bank  of  England.     It  is  no  part  of  its  reserve,  and 
it  is  a  great  misfortune  that  the  framers  of  the  Act  of 
1844  should  have  made  the  exceedingly  unintelligent 
blunder  of  mixing  up  together  in  the  weekly  reports  of 
the  bullion  at  the  Bank,  two  absolutely  dissimilar  and 
distinct  things — the  gold  stored  away  by  one  office  to 
face  the  bank-notes,  and  the  gold  belonging  to  the  Bank 
of  England  as  a  banker.     The  gold  at  the  State's  office 
lies  under  self-acting  rules.     It  may  be  said  to  belong 
to  an  automaton, — so  many  more  notes  out,  so  much 
more  gold  in  store,  or  the  reverse.     The  fluctuations  of 
the  notes  denote  that  the  public  is  buying  fewer  or  more 
notes  with  gold,  nothing  more.      Fluctuations,  on  the 
contrary,  in  the  bank-notes  held  by  the  Banking  Depart 
ment,  are  genuine  changes  in  the  reserve  of  a  private 
bank,  and  alone  should  be  subject  to  banking  discus 
sions  as  to  the  state  of  the  Bank,  the  rate  of  interest, 
and  other  kindred  matters. 

5.  The  figure  which  divides  the  issues  resting  on  the 
Bank's  liability  and  those  for  which  gold  is  actually  stored, 
has  great  importance.     It  was  laid  down  in  the  Act  at 
fourteen  millions,  upon  no  deeper  reason  probably  than 
that  this  sum  was  due  by  the  State  to  the  Bank,  and  that 
a  vague  notion  prevailed  at  the  time  that  this  debt  was 


PAPER  CURRENCY.  67 

specially  assigned  as  a  security  for  the  notes.  The  lapse 
of  private  issues  raises  the  figure  as  time  rolls  on.  The 
important  practical  point  is  to  ascertain  the  figure  up  to 
which  the  public  will  retain  the  notes  issued  and  never 
present  them  for  payment  in  the  worst  of  crises.  From 
the  nature  of  things  only  a  rough  approximation  to  this 
limit  can  be  made  ;  but  this  much  is  ascertained  fact,  that 
since  the  passing  of  the  Act  the  public  has  never  asked 
for  payment  in  cash  of  any  notes  beyond  those  for  which 
the  automaton,  the  State  Office,  had  gold  ready  in  hand 
to  give  ;  not  one  of  the  uncovered  notes,  which  the  Bank 
of  England  was  liable  for,  has  been  presented.  There 
has  never  been  since  1844  the  slightest  tendency  of  a 
run  upon  the  Bank  for  the  payment  of  a  single  one  of  the 
fifteen  millions  of  notes.  Gold,  no  doubt,  is  constantly 
asked  for  at  the  counters  of  the  Bank ;  but  what  does  the 
Bank  do  ?  It  sends  the  notes  over  to  the  State  Office, 
and  gets  gold  for  them  at  once;  but  the  stock  of  the  Issue 
Department  has  never  been  exhausted.  The  Directors 
of  the  Bank  of  England  have  never  been  called  upon  in 
the  worst  times  to  give  a  thought  about  providing  gold 
for  the  uncovered  notes.  These  fifteen  millions,  so  far, 
have  proved  to  have  been  founded  on  a  rock,  and  are 
covered  either  by  gold  or  securities.  The  currency  of 
England  is  thus  shown  to  be  of  the  very  strongest : 
a  gold  currency  for  every  practically  possible  demand, 
and  a  paper  currency  purchased  by  the  public  for  which 
the  public  has  a  constant  and  unbroken  demand. 
4 


68       FAILURE  OF  THE  SUPPOSED  IDEA  OF  THE  ACT. 

6.  Lastly  the  great  principle  is  observed  that  the  pro 
fits  of  the  issues  shall  at  least  be  shared  with  the  State, 
and  not  be  the  exclusive  benefit  of  a  private  banker. 
The  Bank,  we  are  informed  by  Mr  Thompson  Hankey, 
pays  nearly  ^200,000  a  year  to  Government  for  the 
fifteen  millions  of  notes  which  it  issues  on  its  own  lia 
bility.  Its  own  profit  from  this  source,  after  deducting 
expenses  of  management,  amounts  to  about  ;£  100,000. 
Thus  the  State  reaps  from  the  issues  double  the  profit 
of  that  earned  by  the  Bank. 

And  now,  what  is  the  final  judgment  to  be  passed  on 
this  much-disputed  law  ?  In  respect  of  the  supposed 
aims  of  its  promoters,  it  must  be  pronounced  a  failure. 
It  failed,  because  they  sought  to  perform  the  impossible. 
They  framed  it  as  a  machine  to  act  on  the  amount  of 
the  paper  currency  of  the  country,  to  be  a  self-acting 
contrivance  for  enlarging  or  contracting  the  circulation, 
according  as  gold  flowed  into,  or  ebbed  away  from,  Eng 
land.  The  Act,  there  is  reason  to  believe,  was  designed 
as  a  remedy  against  drains,  an  impracticable  scheme 
founded  on  a  real  ignorance  of  the  nature  and  laws  of 
currency.  It  proposed  to  regulate  the  amount  of  the 
currency  by  law.  Inflation  would  be  prevented,  for 
issues  which  had  to  be  bought  with  gold  could  never 
be  excessive.  Thus  wild  emissions  of  bank-notes,  con 
sequent  speculation  and  rise  of  prices,  high  discounts, 
drains  of  gold  leaving  the  country,  and  the  offspring  of 
all  these  evils,  panics,  crises,  bankruptcies,  and  ruin  would 


PAPER  CURRENCY.  69 

be  averted,  All  this  was  to  be  done  by  a  self-acting 
machine,  that  nicely  adapted  its  corrective  action  to  the 
precise  maladies  of  the  money-market.  Alas !  these 
wonderful  effects  never  came  to  pass  ;  they  proved  to 
be  only  dreams  of  the  imagination.  Panics  have  been 
as  severe  since  1844  as  before.  The  fluctuations  of  the 
rate  of  discount  have  been  as  violent ;  speculative  joint- 
stock  companies,  works  commenced  on  credit, — destroy 
ing  capital  and  with  no  means  for  completion, — depres 
sion  and  elevation  of  stocks  and  shares,  bankruptcies  and 
commercial  paralyses  which  have  required  years  to  heal, 
have  reached,  under  this  cunningly  devised  Act,  heights 
of  extravagance  previously  unknown.  The  Bank  Act 
was  as  helpless  as  a  baby  to  counteract  the  mischief, 
for  the  very  simple  reason  that  these  matters  lay  clean 
out  of  its  reach  :  it  had  no  hands  wherewith  to  touch 
them.  Its  authors  did  not  know  that  the  quantity  of  a 
metallic  or  of  a  convertible  paper  currency  in  circulation 
is  determined  by  the  number  of  those  particular  trans 
actions — that  buying  and  selling,  including,  of  course, 
bankers'  reserves,  as  being  currency  at  work — which  em 
ploy  ready  money;  and  that  it  is  the  public,  so  wanting 
and  so  using  ready  money,  be  it  coin  or  bank-notes, 
which  regulates  the  number  of  these  tools  of  exchange 
which  shall  be  used,  and  not  the  law,  nor  issuing  bankers, 
nor  any  other  extraneous  force  or  authority.  The  law, 
of  course,  may  forbid  the  public  from  having  as  many 
notes  as  it  would  otherwise  buy  and  employ ;  it  may 


7O  BANK  ACT  DOES  NOT  AFFECT  INTEREST. 

amend  the  Act  of  1844,  and  declare  that  there  shall  be 
ten  millions  of  bank-notes  in  England,  and  no  more. 
The  effect  of  that  would  be  to  increase  vastly  the  use  of 
cheques,  which  would  be  only  the  substitution  of  one 
piece  of  banking  paper  for  another,  or  it  might  compel 
more  coin  to  be  bought  from  miners,  which  would  be  a 
diminution  of  the  national  capital ;  but  it  would  not 
touch  speculation.  Nor  was  this  what  the  parents  of  the 
Statute  had  in  their  minds.  They  thought  of  a  machine 
which  should  act  on  the  voluntary  employment  of 
notes  by  the  public,  and  thereby  control  mercantile 
operations.  But  a  gigantic  speculation,  covering  the 
whole  English  trade,  with  its  rise  of  prices  and  its 
crashes,  may  be  carried  on  without  requiring  a  single  ad 
ditional  bank-note,  if  ready-money  transactions — which 
are  always  relatively  few — are  not  altered.  The  Issue 
Department  cannot  act  on  loans,  discounts  and  rates  of 
interest,  except  so  far  as  it  fixes  the  figure  at  which  the 
storing  of  gold  commences  too  low.  If  the  public 
would  keep  out  permanently  in  circulation  twenty 
millions,  without  ever  presenting  one  for  payment, 
then  the  loan  and  discount  market  loses  five  millions 
of  means ;  but  this  would  be  a  permanent  unchanging 
diminution  of  its  resources  made  once  for  all,  affect 
ing  all  times,  and  utterly  unconnected  with  oscillating 
movements.  The  nation  would  be  so  much  the 
poorer  permanently  by  the  needless  purchase  of  gold. 
That  would  be  the  only  result ;  and  this  is  the  only  way 


PAPER  CURRENCY.  71 

in  which  the  Issue  Department  can  come   in   contact 
with  the  money-market  and  the  rate  of  interest. 

Is,  then,  the  figure  fifteen  millions  the  proper  one,  or 
is  it  too  low  ?  This  is  an  issue  of  fact,  and  facts  will 
supply  the  answer.  On  three  several  occasions,  in  1847, 
1857,  and  1866,  the  Act  was  suspended — that  is,  repealed 
for  the  time,  and  the  Bank  of  England  was  free  to  issue 
as  many  notes  as  it  chose,  without  storing  up  corres 
ponding  gold  in  its  vault.  Under  these  circumstances 
did  the  Bank,  which  had  recovered  its  unrestricted 
liberty  to  issue,  put  into  circulation  more  uncovered 
notes  than  would  have  been  possible  without  suspen 
sion?  The  answer  supplied  by  facts  is,  with  a  trifl 
ing  exception  in  1857,  NO :  and  the  answer  is  crushing 
and  decisive.  The  exception  in  1857  was  ^800,000, 
an  unimportant  sum  in  a  great  crisis.  This  exception 
would  not  have  occurred  had  the  line  stood  then  where 
it  does  now,  at  fifteen  millions.  The  demonstration  is 
complete  that  the  Act  does  not  restrict.  It  does  not 
diminish  by  a  single  pound  the  quantity  of  bank-notes, 
which,  but  for  it,  the  public  would  obtain  without  buying 
them  with  gold.  After  the  suspensions,  the  weekly  re 
ports  of  the  Bank  constantly  proclaimed  that  the  quantity 
which  the  Act  would  have  required  for  the  Issue  Depart 
ment  was  there  through  the  spontaneous  action  of  the 
public.  The  suspensions  of  the  Act  were  thus  shown  to 
be  nullities.  The  sole  enactment  of  the  statute  which 
could  restrict  was  the  requirement  that  beyond  the 


72  SUSPENSION  OF  BANK  ACT  NULLITIES. 

fifteen  millions  gold  must  be  given  for  notes  ;  the  re 
quirement  was  suspended,  yet  every  pound  of  gold  de 
manded  by  the  Act  was  at  the  Bank.  The  suspension 
did  nothing  whatever,  because  with  it  or  without  it  the 
required  quantity  of  gold  was  lodged  at  the  Bank. 

Such  is  the  proof  of  the  nullity  of  Suspension ;  yet 
the  belief  in  its  virtues  is  as  widely  spread  and  as  flour 
ishing  as  ever.  Currency  is  a  matter  of  feeling  with 
the  banking  world  and  its  oracles;  what  contradicts 
feeling  and  improvised  theory  is  passed  by  unheeded, 
but  men  who  know  what  science  is  think  and  speak 
otherwise.  Professor  Sumner,  in  his  able  work  on 
American  currency,  states  plainly  that  the  nullity  of 
the  effect  of  Suspension  disposes  of  the  charge  brought 
against  the  Act  of  1844,  that  it  restricts.  But  this  can 
not  be  so,  replies  the  City.  How  can  it  be  said  that 
the  Act  does  not  restrict,  when  veteran  bankers  and  in 
telligent  merchants  in  every  commercial  agony  clamour 
for  its  suspension,  and  declare  that  they  find  from 
it  instantaneous  relief?  To  this  the  answer  is  simple: 
a  charm  often  effects  a  cure.  A  phial  of  pure  water, 
believed  to  be  medicine,  has  often  given  relief  to  suffer 
ing  patients;  but  is  it  water  or  the  delusion  which 
cures  ?  A  crisis  in  the  money-market  is  a  matter  of 
alarm ;  wild  uncertainty, — who  is  solvent  ?  and  who 
is  going  to  fail  ? — terrifies  every  merchant  and  every 
banker.  What  so  natural,  then,  as  the  conviction  that 
bank-notes  gushing  forth  in  unchecked  numbers  will 


PAPER  CURRENCY.  73 

dispel  the  danger  ?  Ignorance  and  imagination,  set  in 
motion  by  fright,  may  work  miracles.  The  illusion, 
once  imbibed,  changes  conduct  at  once.  The  frightened 
depositor  or  creditor,  when  he  hears  of  the  suspension, 
ceases  to  think  about  rushing  to  demand  payment ;  the 
banker,  under  the  same  power  of  belief,  lends  less 
grudgingly.  But  there  is  no  fact  beneath  this  action, 
only  imagination.  A  nullity,  vivified  by  the  imagina 
tion,  can  bring  no  lasting  aid.  Let  us  listen  to  Mr 
Patterson,  speaking  of  the  crisis  of  1866  : — "The  panic 
was  at  its  height  at  mid-day.  Shortly  before  one  o'clock 
the  second  editions  of  the  daily  papers  announced  that 
the  Bank  Act  was  suspended.  A  salutary  change  be 
came  possible,  and  the  crowds  in  the  adjoining  streets 
diminished.  The  run  slackened ;  but  the  announcement 
was  premature.  The  Bank  Act  was  not  suspended,  nor 
indeed  at  that  time  had  the  Government  given  any  at 
tention  to  the  matter.  In  this  emergency  a  deputation 
from  the  joint-stock  and  private  banks  was  despatched 
to  apprise  the  Government  of  the  state  of  matters  in  the 
City,  and  to  urge  the  immediate  suspension  of  the  Act 
of  1844.  In  the  City  the  managers  and  directors  of 
banks  and  other  monetary  establishments  remained  at 
their  post  till  past  midnight,  anxiously  receiving  tidings 
of  disaster,  and  waiting  for  the  announcement  of  the 
suspension  of  the  Act.  It  was  midnight  before  the 
announcement  was  made.  The  effect  of  the  announce 
ment  was  so  salutary,  that  next  day  (Saturday)  it  was 


74  THE  BANK  ACT  A  GOOD  ACT. 

thought  that  the  crisis  was  at  an  end."  Can  picture  be 
more  graphic  ? — the  terrified  and  ignorant  crowds  wait 
ing  for  the  angel  to  come  and  trouble  the  water,  and 
the  instantaneous  relief  when  he  came.  But  was  it  a 
cure  ?  Let  us  hearken  to  the  next  words  of  Mr  Patter 
son  : — "But,  as  became  visible  in  a  day  or  two,  the  crisis 
was  not  at  an  end."  How  could  it  ?  The  suspension 
did  not  give  a  note  more  to  the  agonised  borrowers  than 
they  would  have  had  without  it.  Helpless  terror  and 
unreasoning  ignorance  could  not  farther  go. 

Restriction  and  suspension  being  swept  away,  the 
Bank  Charter  Act  of  1844  comes  forth  in  all  its  sim 
plicity.  It  is  a  good  Act,  but  not  in  the  sense  conceived 
by  its  authors.  •  It  gives  to  the  nation  a  perfectly  pro 
tected  paper  currency,  part  of  it  by  actual  gold  in  hand, 
part  by  the  securities  in  which  the  Bank  is  required  to 
place  what  it  receives  for  its  portion  of  the  notes. 
The  nation  saves  the  fifteen  millions  of  capital  which 
it  would  have  cost  to  purchase  metallic  tools.  The 
nullity  of  suspension  proves  that  the  Act  inflicts  no 
injury  on  the  money-market.  The  nation  receives 
twice  as  much  profit  from  the  issues  as  the  Bank.  The 
purchase  of  fifteen  millions  of  securities  by  the  Bank 
sets  free  that  amount  of  capital  to  take  its  part  in  the 
production  of  wealth.  Two  amendments  would  render 
the  Act  complete.  The  office  of  issue  ought  to  be 
placed  in  Somerset  House  or  Whitehall ;  the  world 
would  then  understand  that  the  State  is  the  real  issuer. 


PAPER  CURRENCY.  75 

And,  secondly,  in  the  weekly  reports,  the  bullion  which 
belongs  to  the  Issue  Department  should  be  kept  strictly 
apart  from  the  bullion  which  belongs  to  the  Bank  of 
England  as  a  private  banker. 

One  point  more  remains  to  be  noticed.  Of  what 
denomination  ought  notes  to  be  ?  Much  opposition  is 
directed  in  England  against  small  notes,  but  it  has  its 
roots  in  prejudice  and  not  in  science.  The  size  of 
notes  is  a  question  of  convenience,  coupled  with  the  im 
portance  of  guarding  against  forgery.  One-pound  notes 
are  eminently  prosperous  in  Scotland ;  they  are  even  pre 
ferred  to  sovereigns.  In  Austria,  Italy,  and  America, 
notes  much  smaller  than  those  of  one  pound  circulate 
freely  and  successfully.  No  objection  is  heard  against 
them,  except  when  very  small;  they  are  then  apt  to 
become  dirty,  defaced,  and  capable  of  being  easily 
forged.  The  denomination  of  notes  is  analogous  to 
that  of  cheques.  Very  small  cheques  cause  bankers 
much  trouble  and  clerical  work ;  they  are  consequently 
disliked.  One-pound  notes  were  suppressed  in  England 
by  an  act  of  panic  and  ignorance.  In  1825  many  issu 
ing  banks  became  insolvent,  and  their  one-pound  notes, 
which  were  widely  "spread  in  retail  business,  brought 
grievous  loss  to  many  poor  persons.  The  denomina 
tion  of  bank-notes  was  consequently  limited  to  five- 
pounds.  It  was  not  perceived  that  the  loss  arose, 
not  from  the  size  of  the  note,  but  the  badness  of  the 
issuer,  and  that  the  objection  lay  against  any  notes, 


76    POPULAR  THEORY  OF  A  MIXED  CURRENCY  ABSURD. 

of  whatever  kind  being  issued  by  such  untrustworthy 
agency. 

We  must  not  bid  farewell  to  the  Bank  Charter  Act 
of  1844  without  mentioning  a  wonderful  doctrine  pro 
pounded  in  connection  with  it  by  persons  who  claim  to 
possess  the  highest  authority  on  currency.  The  greatest 
stress  is  laid  upon  this  doctrine  as  expressing  the  funda 
mental  principle  which  ought  to  govern  all  currencies 
which  are  composed  of  coin  and  convertible  bank-notes 
mixed  together.  It  is  believed  that  this  doctrine  was 
reckoned  by  those  who  were  supposed  to  be  the  advisers 
of  Sir  Robert  Peel  to  be  the  brilliant  discovery  of  the 
grand  secret  which  gives  soundness  to  a  mixed  circula 
tion  ;  but  this  cannot  be  affirmed  with  certainty.  But 
however  that  may  be,  this  principle  is  fondly  held,  and 
strenuously  proclaimed,  by  great  personages,  by  Chan 
cellors  of  the  Exchequer  in  and  out  of  Parliament,  by 
Secretaries  of  State  laying  down  rules  for  the  currencies 
of  important  colonies  and  dependencies,  and  by  count 
less  writers  who  speak  authoritatively  on  currency. 
This  doctrine  affirms  that  a  mixed  currency  of  coin  and 
paper  should  be  made  to  circulate  in  the  same  quantity 
as  if  it  had  been  purely  metallic.  Had  the  assertion 
been  that  the  mixed  currency  should  be  made  through 
out  of  the  same  quality  as  the  purely  metallic,  it  would 
have  been  perfectly  intelligible,  and  of  unquestionable 
excellence.  The  framers  of  the  Bank  Act  might  have 
fairly  boasted  that  they  had  carried  it  out  into  execu- 


PAPER  CURRENCY.  77 

— that  the  currency  of  England  contained  bank 
notes  which  were  as  good,  as  trustworthy,  as  sound 
guarantees  of  value  as  the  sovereigns  which  circulated 
by  their  side.  But  to  make  the  numbers  of  a  mixed 
currency  the  same  as  if  the  currency  had  been  all  of 
sovereigns — that  indeed,  the  ex-Lord  Mayor  might  have 
said,  passes  the  human  understanding. 

We  need  not  dwell  on  the  questions — first,  How  in 
the  world  any  one  is  to  find  out  whether  the  bank 
notes  of  a  mixed  currency  are  more  or  fewer  than  the 
sovereigns  which  would  have  been  used,  had  there  been 
no  bank-notes  ?  and,  secondly,  Having  found  this  out, 
by  what  process  he  is  to  force  the  public  to  take  more 
notes  to  fill  up  the  deficiency,  or  to  surrender  the  excess 
which  it  has  contrived  to  get  into  its  hands  ?  Nor  need 
we  challenge  the  inventors  of  this  doctrine  to  explain 
their  conception  of  the  nature  of  currency,  or  the  possi 
bility  of  making  any  one,  except  the  public  itself,  the 
determiner  of  how  many  sovereigns  and  bank-notes  it 
will  buy  and  use;  it  is  enough  to  ask  them  whether 
they  imagine  it  to  be  possible  to  violate  the  law  of 
gravity  in  coins  and  notes  one  particle  more  than  in 
any  other  substance  ?  Coins-  are  heavy,  bank-notes  are 
light.  Supposing  these  tools  to  be  equally  efficient, 
equally  trusted,  can  it  be  conceived  that  the  public 
would  employ  as  many  of  the  heavy  as  of  the  light 
ones  ?  Can  any  one  believe  that  if  the  twenty  millions 
and  more  of  Bank  of  England  notes  were  suppressed 


/  8  INCONVERTIBLE  NOTES. 

altogether,  as  many  sovereigns  would  be  asked  for  to 
supply  their  places  ?  Every  day  men  carry  about  their 
persons  bank-notes  worth  thousands,  even  hundreds  of 
thousands,  of  pounds  ;  would  they  ever  be  willing  to 
carry  as  many  sovereigns  ?  What  an  opportunity  for 
thieves — the  visible  and  tempting  bags,  instead  of  the 
invisible  bank-notes.  Is  it  not  obvious  that  the  extinc 
tion  of  the  Bank  of  England  notes  would  be  followed 
by  a  huge  increase  of  cheques  ?  Poor  currency !  hard 
indeed  is  its  fate.  The  professors  of  its  science  teach 
palpable  absurdity ;  the  public  is  bewildered,  and  fails 
to  understand  ;  the  oracles  insist  with  gravity  that  they 
possess  a  science  which  is  a  mystery  for  the  many ;  and 
the  world  pronounces  currency  to  lie  beyond  the  human 
understanding. 

Section  III.— Inconvertible  Bank- Notes. 

We  have  now  reached  the  region  where  theory  revels  in 
all  its  forms  :  inconvertible  bank-notes.  Great  Govern 
ments  seize  with  avidity  upon  this  form  of  currency  as 
the  means  of  reaping  gain  at  the  expense  of  the  com 
munity,  and  then  they  justify  their  practice  by  throwing 
dust  into  the  eyes  of  the*  public  by  the  help  of  every 
kind  of  arbitrary  and  unscientific  assertion.  The  sub 
ject  deserves  the  closest  examination. 

An  inconvertible  bank-note  is  a  paper  tool  of  exchange 
which  acknowledges  on  its  face  a  debt  to  be  due,  which 
promises  to  pay  it,  but  specifies  no  fixed  time  for  the 


TAPER  CURRENCY.  79 

payment,  and  for  which  consequently  the  coin  promised 
cannot  be  obtained  on  demand.  The  first  thought 
which  arises  is  the  question  :  how  is  it  that  any  one  is 
willing  to  give  away  his  property  in  exchange  for  such 
paper  ?  A  convertible  bank-note  indeed  is  not  payment, 
but  the  coin,  which  is  payment,  can  be  procured  for  the 
asking ;  thus  the  guarantee  it  furnishes  to  a  seller,  that 
he  shall  be  able  to  obtain  other  goods  equal  to  those  he 
has  sold,  is  complete.  A  bank-note  not  payable  on  de 
mand  supplies  no  such  guarantee  ;  it  is  not  certain  that 
it  ever  will  be  paid  at  all.  It  circulates  for  two  reasons  ; 
it  is  issued  by  the  Government,  and  the  belief  is  univer 
sal  that  a  Government  will  never  repudiate  its  liability, 
and  will  pay  at  last.  But  this  belief,  by  itself  alone, 
would  not  be  sufficient  to  ensure  a  large  and  easy  circu 
lation  for  such  paper  guarantees,  so  Governments  apply 
to  them  an  instrument  of  great  efficacy  for  attaining 
their  end.  They  endow  them  with  the  right  of  legal 
tender  ;  they  enact  a  law  which  compels  every  creditor 
who  has  debited  a  buyer  with  a  dollar  or  pound  to 
accept  these  notes  as  a  full  discharge  of  his  debt.  Upon 
such  a  basis  the  operation  of  issue  becomes  feasible. 
The  Government  owes  interest  on  a  national  debt, 
and  purchases  supplies  of  all  kinds  from  traders.  It 
forces  the  national  creditors  to  take  these  notes  as  pay 
ment  of  the  interest  due,  and  persuades  contractors 
to  supply  them  with  goods  by  means  of  the  knowledge 
that  they  will  be  able  in  turn  to  pass  on  these  notes 


So  EXCESS  OF  INCONVERTIBLE  NOTES. 

to  all  to  whom  they  are  indebted.    Thus  the  notes  come 
forth,  and,  once  out,  do  not  return  upon  the  issuer. 

2.  The  next  fact  to  notice  is  that  on  one  condition 
these  notes,  for  which  payment  cannot  be  demanded  at 
pleasure,  circulate  on  a  level  of  value  with  coin — the 
condition  that  their  numbers  shall  not  be  in  excess 
of  the  want  of  the  public  for  these  tools ;  that 
their  supply  shall  not  exceed  the  demand.  In  the 
case  of  coin,  as  we  have  seen,  an  excess  of  metallic 
dollars  or  sovereigns  flows  back  at  once  to  the  strong 
holds  for  storing  them,  precisely  as  the  farmer's  ploughs 
in  icy  winter  return  to  their  sheds.  In  the  same  manner 
bank-notes  payable  on  demand  come  back  upon  the 
issuers  ;  no  one  wants  them.  But  inconvertible  bank 
notes  have  no  such  machinery  for  adapting  their  numbers 
to  the  requirements  of  the  public  for  them  ;  once  out  in 
circulation,  they  are  always  out ;  there  is  no  self-adjust 
ing  apparatus  for  them,  as  there  is  for  the  other  tools  of 
exchange.  Now,  it  may  well  happen  that  the  quantity 
of  inconvertible  notes  issued  is  not  greater  than  what 
the  public  requires  ;  so  it  was  with  the  Bank  of  England 
notes  for  several  years,  when  it  was  forbidden  by  law  to 
pay  its  notes  in  gold.  Similarly  in  other  countries  ex 
cess  has  been  often  found  to  be  very  small.  But  what 
is  excess  ?  As  with  all  tools,  too  many  for  the  work 
they  have  to  do  ;  and  it  has  been  shown  that  that  work 
is  to  effect  those  exchanges,  that  buying  and  paying, 
in  which  each  particular  tool  is  employed.  Ready 


PAPER  CURRENCY.  8 1 

money  payments  are  the  work  to  be  performed  ;  and  if 
these  payments  do  not  increase,  whilst  the  stock  of 
bank-notes  circulating  is  enlarged,  then  there  is  excess. 

3.  But  what  is  the  test  of  the  existence  of  excess,  or 
to  use  popular  language,  of  inflation  ?     What  effect  is- 
generated  which  leads  to  the  discovery  of  its  cause  ?    A 
fall  in  the  value  of  the  paper  compared  with  the  value 
of  the  coin  which  it  acknowledges   to  be  due.      The 
supply  of  them  is  too  great ;    many  persons  have  more 
of  them  than  they  know  what  to  do  with  ;    to  get  rid  of 
them  they  are  willing  to  part  with  them  at  a  reduced 
value.      It  may  be   difficult  to  specify  the  case  of  a 
definite  holder  of  them  who  goes  through  this  process 
of  thinking,  and  then  resolves  to  reckon  them  as  worth 
less ;  but  it  is  impossible  to  doubt  that  this  is  what  takes 
place  in  practical  life,  and  that  the  depreciation  of  the 
notes,  whether  expressed  in  the  United  States  by  the 
premium    which    gold    bears    compared    with    paper 
dollars,  or,  as  formerly  in   England,  by  the  discount 
attached  to  the  notes,  is  the  result  purely  of  an  excess 
of  supply,  which  lowers  the  value  of  all  commodities 
alike.     Each  additional  issue  adds  to  the  depreciation 
and  to  the  disorder  which  it  creates  in  all  money  trans 
actions.     The  notes  are  worth  less  and  less. 

4.  Thus,  an  inconvertible  bank-note  becomes  tainted 
with  the  worst  vice  which  a  currency  can  possess — un 
steadiness  of  value.     It  purchases  more  or  else  less  of 
the  same  goods  at  different  times.     We  know  that  the 


82       INCONVERTIBILITY  SPOILS  TOOL  OF  EXCHANGE. 

essence  of  a  good  currency  is,  that  it  should  give  to  the 
man  who  takes  it  a  reliable  assurance  that  he  shall  be 
able  with  it  to  procure  other  goods  of  the  same  value  with 
those  which  he  has  given  away  :  an  inconvertible  bank 
note  deliberately  corrupts  and  vitiates  that  assurance. 
He  is  not  sure  that  he  will  not  incur  special  loss  through 
the  bank-note  currency,  a  loss  intended  by  neither  buyer 
nor  seller,  but  not  the  less  real  on  that  account.  The 
debasement  of  the  tool  of  exchange  is  an  annoying  and 
mischievous  nuisance,  thrust  into  a  region  from  which  it 
should  be  rigorously  excluded,  the  exchanging  of  the 
necessaries  and  enjoyments  required  by  civilization.  It 
is  thrust  in  for  a  motive  absolutely  unconnected  with 
the  sole  purpose  for  which  any  currency  exists  and 
passes  into  universal  use.  It  is  as  wanton  a  perversion 
of  a  most  indispensable  tool  as  if  any  one  were  to  im 
part  to  the  blade  of  a  knife  a  quality  which  would  make 
it  sharp  or  blunt  capriciously.  The  change  in  the 
nature  of  the  currency  tells  on  every  price  in  every  shop 
or  store — for  price  is  only  the  quantity  of  currency  com 
puted  to  be  equal  to  the  value  of  the  goods.  The  more 
civilized  a  nation  is,  the  vaster  the  development  of  its 
trade,  the  larger  the  number  of  debts  to  be  settled  and 
stipulated  annuities  to  be  continuously  paid,  the  more 
disastrous  is  the  violence  done  to  the  currency,  the 
more  injurious  its  consequences  to  society.  Every 
sale  on  credit  is  converted  into  gambling,  and  what 
but  pure  harm  can  come  from  adding  an  inevitable  ele- 


PAPER  CURRENCY.  83 

ment  of  gambling  to  every  shopkeeper's  accounts,  to 
every  bill  which  moves  the  operations  of  commerce,  to 
every  purchase  of  a  house  or  farm  which  covenants  for 
the  payment  of  a  rent  of  so  many  dollars  or  pounds  for 
a  number  of  years,  to  every  man  who  lives  by  the  inter 
est  of  the  national  debt  of  the  country  ?  And  no 
small  part  of  the  evil  hence  resulting  is  the  necessity 
imposed  on  traders  to  add  to  the  natural  price  of  their 
goods  as  a  protection  against  the  risks  consequent  on 
the  corruption  of  the  public  money.  Most  of  all 
is  this  felt  in  foreign  trade.  The  Englishman  or 
German  who  sends  a  cargo  of  goods  to  America, 
knows  that  he  will  be  paid  with  bills  expressed  in 
dollars  :  he  cannot  tell  what  will  be  the  value  of  the 
dollar  when  the  bills  become  due  :  he  protects  himself 
by  exacting  from  the  American  buyer  a  stiffer  price. 

And  it  is  no  small  part  of  the  calamity  and  disgrace 
of  an  inconvertible  currency  that  it  leads  to  large  and 
incessant  violation  of  contracts.  Every  stipulated  sum 
which  has  to  be  paid  with  such  notes  is  -one  thing 
to-day  and  another  thing  to-morrow.  The  essence  of 
honour  and  good  faith  in  contracts,  as  well  as  of  trust 
worthy  trade,  is  to  give  the  thing  covenanted ;  but 
in  the  place  of  that  stipulated  value  the  nominal 
paper  dollar  specified  is  given,  as  if  that  was  the  pay 
ment  agreed  upon.  But  what  does  the  unhappy  re 
ceiver  discover  ?  That  he  has  been  defrauded — that 
the  paper  dollar  he  gets  will  not  buy  as  much  as  the 


84  NO  ONE  CAN  SAY  WHAT  A  DOLLAR  IS. 

dollar  he  stipulated — that  prices  have  gone  up  in  every 
store — and  that  he  is  injured  in  purse  and  property. 
In  raising  prices  storekeepers  are  impelled  .by  necessity. 
Real  prices  are  not  altered  ;  the  sellers  ask  for  more 
dollars,  but  as  every  dollar  is  worth  less,  the  larger 
number  of  dollars  now  brings  them  only  the  same 
value,  when  it  becomes  their  turn  to  buy  goods  with 
them.  Every  creditor  who  is  paid  in  the  paper  dollar 
encounters  these  raised  prices,  and  finds  that  a  portion 
of  his  property  has  been  confiscated.* 

These  public  misfortunes  are  summed  up  in  the  fact 
that  no  one  is  able  to  say  what  a  dollar  is.  A  dollar  be 
comes  a  word  whose  meaning  no  one  knows :  it  must  be 
sought  from  the  price  of  gold  in  paper  dollars.  The  dollar 
has  a  new  meaning  on  each  succeeding  day:  it  is  one  thing 
to-day,  another  to-morrow :  is  it  possible  for  a  currency, 
whose  one  and  only  function  is  to  enable  to  buy  with 
certainty  as  much  as  was  sold,  to  possess  a  greater  vice  ? 

It  might  be  a  wonder  that  such  a  dollar  should  have 
any  value^— that  any  one  should  be  willing  to  give  his 
goods  for  it.  The  reason  for  its  having  value  is  that  the 
paper  has  written  upon  it  a  promise  that  the  United 
States  will  give  a  dollar — plainly  a  metallic  dollar — for 
it,  and  it  is  this  belief  that  at  some  time  the  United 

*  Some  of  the  details  01  the  injuries  wrought  by  an  inconvertible  cur 
rency  are  given  with  great  vigour  in  a  very  able  «fnd  admirable  "  Address 
delivered  at  Omaha  by  Professor  A.  L.  Perry,  of  Williams  College." 
They  will  be  found  in  the  Appendix. 


PAPER  CURRENCY.  85 

States  will  make  good  their  word  which  induces  the 
public  to  attach  value  to  the  greenback.  The  public 
faith  is  pledged  ;  the  responsibility  thence  arising  on 
the  Government  for  all  the  evils  which  the  paper  dollar 
inflicts  on  society  thus  becomes  only  too  clear. 

5.  The  usual  defence  pleaded  for  inconvertible  bank 
notes  is  necessity,  the  political  distress  of  the  hour.  The 
State  is  in  urgent  want  of  means,  the  limits  of  taxation 
have  been  reached.  What  else  can  a  government  do 
under  such  circumstances  but  procure  what  it  imperi 
ously  requires  with  promises  to  pay  at  some  future  time  ? 
It  may  be  so.  On  this  principle  national  debts  may  be 
justified. .  The  State,  in  its  day  of  need,  obtains  wealth 
from  the  country  on  credit,  and  consumes  it ;  in  return, 
it  gives  an  annuity  to  the  lenders.  In  such  a  transac 
tion  there  is  one  injury — the  destruction  of  the  wealth 
borrowed  ;  but  the  injury  occurs  once  only,  and  then  it 
ends.  Not  so  with  inconvertible  notes.  In  common 
with  a  national  debt,  an  issue  of  inconvertible  bank 
notes  obtains  and  consumes  a  country's  wealth  with 
out  payment ;  but  a  mischief  in  addition  is  set  to  work 
which  never  stops.  As  long  as  an  inconvertible  cur 
rency  lasts,  it  never  ceases  to  harass  trade  and  every 
commercial  dealing  between  man  and  man.  The  harm 
is  renewed  day  after  day,  week  after  week,  year  after 
year  ;  and  all  the  while  the  State  is  gaining  from  all  this 
disorder  nothing  proportionate  to  the  mischief  created. 
There  is  no  counterbalancing  advantage  to  the  Govern- 


86        THE  PAPER  DOLLAR  POISONS  EVERY  SALE. 

ment  to  compensate  the  loss  which  the  countiy  suffers. 
The  Government  created  the  inconvertible  note  as 
a  tax  on  which  it  saves  interest,  and  gathered  the 
tax  once  for  all ;  but  a  bad,  unsound,  untrustworthy 
currency  persecutes  society  at  every  turn  and  brings 
loss  on  all  but  gamblers.  It  poisons  every  sale 
as  the  days  roll  on,  every  exchange  ;  and  what  is 
human  life  but  making  and  exchanging  ? 

The  moral  which  these  facts  teach  is  clear.  Over 
whelming  necessity  may  excuse  the  original  imposition 
of  so  easy  but  so  vicious  a  tax,  but  the  pressure  once 
over,  not  an  hour  should  be  lost  by  any  legislature  who 
has  any  knowledge  of  the  nature  and  working  of  money, 
to  arrest  the  plague  and  sweep  away  inconvertible  paper. 

But,  reply  many  persons  in  every  country,  most  of  all 
in  the  United  States,  trade  rises  or  falls  with  the  abun 
dance  or  scarcity  of  money.  Plenty  of  money  means 
lively  business — buyers  abound.  What  can  they  do 
with  their  money  but  buy  with  it  ?  It  will  walk  into 
every  store,  every  shop.  Borrowers,  when  money  is 
plentiful,  will  find  it  easy  then  to  obtain  the  means  for 
carrying  on  an  expanding  trade.  Is  it  not  notorious 
that  liberty  to  issue  cheapens  discount,  because  it  en 
ables  a  banker,  at  no  cost  to  himself,  to  place  means 
of  buying  in  the  hands  of  his  friends  ?  There  cannot  be 
too  much  money — who  ever  heard  of  such  a  thing  ?  It 
is  easy  to  speak  of  inflation,  but  it  remains  true  all  the 
same,  that  the  man  who  has  bank-notes  in  his  pocket, 


PAPER  CURRENCY.  87 

be  they  inflated  or  not,  can  buy,  and  that  the  banker  can 
shower  these  notes  upon  him  at  less  than  six  cents  a-piece. 
That  such  fallacies  should  be  uttered  in  the  nine 
teenth  century  is  astonishing.  First  of  all,  such  lan 
guage  does  not  know  that  currency  is  only  a  tool,  that 
money  is  not  the  thing  which  really  buys,  but  only  an 
instrument  used  in  buying.  It  is  the  property  with 
which  money  is  itself  bought  that  buys.  Buying  is 
only  exchanging  goods,  absolutely  nothing  else ;  to  sell 
for  money  is  only  double  barter  in  the  place  of  single 
barter.  Money  does  not,  directly,  produce  a  single 
particle  of  wealth,  nor  create  any  additional  power  of 
buying  which  would  not  exist  without  it ;  it  only  places 
wealth  in  different  hands.  An  issuing  banker  or 
Government  may  by  the  help  of  a  piece  of  paper  take 
property  out  of  one  man's  disposal  and  put  it  in 
another's ;  but  without  the  bank-note,  that  property 
would  be  exchanged,  that  is,  would  buy  and  sell,  just 
the  same.  Money  cannot  create  increase  of  trade,  un 
less,  if  coin,  it  is  obtained  as  a  gift  from  the  miners,  then  of 
course  the  country  which  receives  the  present  could  with 
it  get  more  wealth  from  some  other  nation  ;  but  if  the 
gift  is  in  coin  and  remains  coin,  then  the  nation,  though 
getting  it  for  nothing,  would  not  be  one  particle  the 
richer,  supposing  that  already  its  currency  was  full. 
With  respect  to  bank-notes,  their  action  is  to  procure 
property  from  one  section  of  the  public  and  transfer  it 
to  another.  If  the  notes  are  irredeemable,  the  issuer,  if 


88  INFLATION  KILLS  GOOD  BANKING. 

a  Government,  has  acquired  and  consumed  a  portion  of 
the  nation's  wealth — there  is  less  property  for  trade, 
less  for  exchanging.  If  the  issuer  is  a  private  banker, 
he  and  his  friend  to  whom  he  lends  it  on  discount  have 
taken  away  property  from  the  holders  of  the  bank-notes, 
and  employ  it  for  their  own  purposes.  With  that  pro 
perty,  of  course,  they  can  and  do  trade ;  but  if  it  had 
been  left  with  the  public,  the  goods  of  which  it  consists 
would  have  been  exchanged,  would  have  been  bought 
and  sold  just  the  same.  There  is  no  increase  of  wealth 
or  of  trade  for  the  whole  country.  No  motive  can  be 
derived  from  the  language  here  examined  for  inflicting 
on  a  nation  the  intolerable  mischief  of  gambling  and 
uncertainty  imported  into  every  commercial  transaction 
by  a  tool  of  exchange  corrupted  by  incessant  fluctua 
tions  of  value.  At  all  times  and  in  every  place,  there 
is  one  paramount  quality  of  a  currency  that  can  do  its 
work,  that  it  shall  be  able  to  buy  goods  worth  those 
that  have  been  sold. 

But  another  mischief  is  exceedingly  apt  to  be 
developed  under  an  inconvertible  paper  currency. 
When  banks  are  employed  as  the  instruments  of  its 
issue,  experience  overwhelmingly  shows  that  good 
banking  tends  to  disappear.  Bankers,  by  the  help  of 
such  notes,  obtain  resources  so  easily  that  they  become 
excited  and  careless  of  prudence.  They  lend  them 
selves  to  fostering  speculation,  to  promoting  wild 
companies,  to  making  roads  in  the  wilderness  which 


PAPER  CURRENCY.  89 

cannot  repay  for  years  the  wealth  destroyed  in  con 
structing  them,  and  to  other  like  operations.  When 
the  day  of  reckoning  arrives  at  last,  it  is  discovered 
that  a  large  part  of  what  was  obtained  from  the  public 
has  been  lost  for  ever,  whilst  the  baneful  unstable  cur 
rency  remains.  Well  might  Mr  Greene,  as  quoted  by 
Mr  Edward  Atkinson,  exclaim,  when  speaking  of  the 
consequences  of  the  Legal  Tender  Act,  "Speculation 
ran  riot,  every  form  of  wastefulness  and  extravagance 
prevailed  in  town  and  country,  nowhere  more  than  in 
Philadelphia,  under  the  very  eyes  of  Congress — luxury 
of  dress,  luxury  of  equipage,  luxury  of  the  table.  We 
are  told  of  an  entertainment  at  which  .£800  were  spent 
in  pastry.  As  I  read  of  the  private  letters  of  those  days, 
I  sometimes  feel  as  a  man  might  feel  on  looking  down 
on  a  foundering  'ship  whose  crew  were  preparing  for 
death  by  breaking  open  the  steward's  room  and  drinking 
themselves  into  madness."  The  Legal  Tender  currency 
placed  the  nation's  wealth  in  the  hands  of  destroyers. 

What  is  a  dollar  ?  it  has  .been  seen  is  the  question 
which  an  inconvertible  currency  cannot  answer.  Most 
correctly  and  humorously  exclaims  Mr  Atkinson, 
"  Why  not  say  the  greenback  ?  A  dollar  is  a  piece  of 
gold  or  silver  which  we  have  outgrown.  The  only  use 
of  notes  is  to  buy  with  ;  why  not,  instead  of  printing 
on  paper,  '  The  United  States — One  Dollar,'  print,  The 
United  States,  one  turkey,  one  roast  pig,  or  one  horse ; 
and  for  small  change,  The  United  States,  one  news- 


9O  THE  3-65  PROPOSAL. 

pap.er,  and  make  them  a  legal  tender,  promising  to 
convert  them  into  bonds  at  3*65  interest,  which  interest 
of  course  would  not  be  paid  in  gold,  for  gold  is  esteemed 
a  useless,  mischievous  tyrant,  out  of  date,  fit  only  to 
be  exported  or  banished,  fit  for  foreign  paupers,  but 
entirely  played  out  in  enlightened  America.  If  it  is  pro 
posed  to  pay  interest  in  gold  on  the  inconvertible  bonds, 
the  specie  standard  is  admitted,  and  the  whole  case  is 
given  up.  If  it  is  proposed  to  pay  the  interest  in  in 
convertible  notes,  then  the  proposal — (to  exchange  the 
notes  for  bonds  at  3*65) — is  only  to  swop  worthless 
pieces  of  stamped  paper,  one  for  another." 

In  the  same  sense  remarks  The  Financier  of  New  York 
of  July  3,  1875,  an  Economical  journal  second  to  none 
in  any  country  for  -ability  and  clearness  of  think 
ing  :  "  As  for  the  only  consistent  and  honest  mode 
of  inflation — not  yet  proposed,  because  it  is  such  a 
mode — that  of  discarding  the  promissory  form  and  issu 
ing  tokens  of  paper,  rubber,  leather,  or  any  convenient 
material,  and  stamping  them  '  One  Dollar/  '  United 
States  of  America,'  under  the  constitutional  power  of 
Congress  to  coin  money,  the  inflationist  would  not  ex 
change  the  meanest  thing  he  has  for  such  money, 
although  he  could  not  consistently  refuse." 

It  is  a  marvellous  thing  that  so  gross  a  delusion  as 
the  supposition  that  a  reality  is  given  to  the  paper 
dollar  by  granting  it  an  interest  payable  in  another 
piece  of  paper  should  have  taken  so  strong  a  hold 


PAPER  CURRENCY.  9  I 

on  men's  minds  in  many  parts  of  America — that  so 
acute  a  people  should  not  have  perceived  that  it 
was  to  explain,  Ignotum  per  ignotum.  It  does  not 
occur  to  them  that  the  vital  question  to  ask  of  every 
currency  is — What  is  its  power  of  buying  ?  will  it  do  its 
work,  and  upon  what  principle  ? 

The  conclusion  is  irresistible  :  an  inconvertible  cur 
rency  is  incapable  of  being  defended.  It  may  have 
had  an  excusable  origin  in  an  overwhelming  political 
situation,  and  if  maintained  for  a  brief  time  only  may 
do  comparatively  small  harm.  But  its  continuance  is 
loaded  with  ever-repeated  calamity  to  the  country.  In 
England  no  man  of  the  smallest  eminence  comes  for 
ward  to  defend  such  a  currency  ;  its  radical  and  incur 
able  badness  is  the  settled  conviction  of  the  English 
people.  Every  one  would  prefer  the  payment  of  interest 
on  an  increase  of  the  National  Debt  to  the  curse  of  a  cur 
rency  which  meant  one  thing  to-day,  and  another  thing 
to-morrow.  In  this  matter  England  has  nothing  to  bias 
her  judgment  on  the  one  side  or  the  other;  such  a  convic 
tion,  therefore,  ought  to  carry  weight  in  the  United  States. 

But  how  is  an  inconvertible  currency  to  be  got  rid  of? 
The  answer  is  not  easy — 

"  Principius  obsta,  sero  medicina  poratur, 
Cum  mala  per  longas  invaluere  moras." 

The  roads  which  lead  back  to  convertibility  are  many. 
Each  country  has  its  own  situation,  and  the  ways  of 
escape  are  different,  though  all  unfortunately  are 

attended  with  pain.     Man  cannot  do  wrong  without  in 
o 


Q2          THE  PATH  OF  RESUMPTION  IN  ENGLAND. 

some  manner  or  other  having  to  atone  for  it  by  suffer 
ing.  In  England  the  path  of  repentance  was  compara 
tively  easy.  The  Bank  of  England  was  responsible  for 
the  notes  it  circulated,  and  it  was  universally  trusted. 
The  discount  to  which  its  notes  had  fallen,  a  guinea 
being  worth  twenty-seven  shillings  in  notes,  was  in  no 
way  due  to  want  of  credit ;  the  cause  was  simply  excess 
of  issues,  which  could  not,  as  bank-notes  and  sovereigns 
now  can,  return  at  once  into  store.  National  misfortunes 
greatly  facilitated  resumption  of  specie  payments.  A 
large  amount  of  notes  issued  by  county  bankers  circu 
lated  by  the  side  of  those  of  the  Bank  of  England.  The 
war  had  swollen  the  price  of  English  corn  inordinately  ; 
peace  brought  the  farmers  of  the  whole  world  into  com 
petition  with  those  of  England.  The  year  1813  pro 
duced  a  most  bountiful  harvest,  prices  fell  heavily,  and 
many  farmers  were  ruined.  Confidence  was  destroyed 
throughout  the  country,  and  banks  fell  into  difficulties. 
In  the  years  1814,  1815,  and  1816,  250  country  banks 
stopped  payment,  and  the  quantity  of  provincial  bank 
notes  was  thus  vastly  reduced.  No  taint  of  suspicion 
came  over  the  notes  of  the  Bank  of  England  ;  its 
notes  rose  in  value,  and  much  of  the  difficulty  of 
resumption  was  thereby  averted.  The  disposition  to 
demand  gold  for  the  notes  disappeared,  for  the  notes 
were  as  valuable,  having  ceased  to  be  in  excess. 
Resumption  exacted  punishment  for  the  past,  inas 
much  as  many  contracts  to  pay  or  repay  pounds  com 
pelled  the  tender  either  of  coin,  or  of  a  bank-note  as  valu- 


PAPER  CURRENCY.  93 

able  as  coin  which  had  become  dearer  than  it  was  when 
the  contracts  were  made;  but  the  events  here  described 
gradually  cleared  off  old  debts  and  new  ones  were 
increasingly  based  on  gold  prices.  As  the  value  of  the 
Bank  of  England  note  rose,  it  became  less  profitable  to 
export  gold  ;  the  bank-note  had  less  the  character  of  an 
inferior  currency,  and  was  less  able  to  drive  gold  away 
abroad.  Thus  the  Bank  of  England  was  enabled  volun 
tarily  to  anticipate  the  day  of  specie  payment  fixed  by 
the  law  and  to  pay  notes  in  gold  in  1821,  instead  of 
1823.  No  resumption  was  ever  less  violent. 

Resumption  would  probably  follow  the  same  course 
in  the  United  States.  The  important  point  is  to  estab 
lish  a  thorough  conviction  in  the  minds  of  the  whole 
people  that  the  return  to  specie  payment  is  irrevocably 
decreed.  When  this  feeling  has  penetrated  the  entire 
nation  the  eyes  of  all  will  be  turned  to  the  fact  that  in 
a  brief  space  of  time  the  paper  dollar  will  possess  abso 
lutely  equal  value  with  the  metallic  dollar,  and  the 
consequence  of  this  will  be  a  steadily  advancing  habit 
of  calculating  all  debts  likely  to  be  of  long  standing, 
and  making  all  pecuniary  arrangements,  on  the  basis 
of  the  metallic  dollar.  Trade  with  foreign  countries 
will  march  on  the  same  line,  importers  will  reckon 
with  ever-increasing  confidence  on  a  currency  as  good 
as  metallic.  The  premium  on  gold  will  gradually 
diminish,  and  there  is  reason  to  believe  that  the  period 
of  resumption  will  be  anticipated  as  it  was  in  Eng 
land  ;  and  just  as  the  Bank  of  England  found  no 


94     WHO  OUGHT  TO  ISSUE  BANK-NOTES  IN  AMERICA? 

difficulty,  as  a  matter  of  fact,  in  obtaining  a  sufficient 
quantity  of  gold  to  face  any  demand  for  gold  on  the 
presentation  of  bank-notes,  so,  I  believe,  will  it  be  in 
America.  But  there  must  be  no  enlargement  of  the  cir 
culation — not  by  a  fraction — in  the  meanwhile,  for  the 
keystone  of  the  whole  building  is  that  the  death  of  the 
inconvertible  paper  is  decreed  past  all  hope  of  change. 

England  possessed  an  advantage  the  absence  of 
which  may  cause  some  embarrassment  to  the  United 
States.  There  is  no  bank-note  paper  in  America 
so  entirely  trusted  as  the  Bank  of  England  note  was 
and  is.  Hence,  Who  shall  be  the  issuer  of  the  United 
States  paper  currency  ?  becomes  an  arduous  pro 
blem.  Direct  issue  by  the  Government,  the  Govern 
ment  receiving  and  holding  the  sums  given  by  the 
public  for  the  bank-notes,  is  a  system,  I  conceive, 
greatly  to  be  deprecated.  It  places  convertibility  at 
the  mercy  of  political  parties.  What  the  Government 
would  do  with  this  vast  receipt  is  not  easy  to  say. 
Probably  it  would  redeem  with  it  existing  debt ; 
but  if  so,  the  fund  guaranteeing  convertibility  could 
hardly  be  said  to  exist.  In  England  the  Bank  is 
compelled  to  lodge  the  fifteen  millions  in  securities. 
They  are  a  concrete  and  tangible  fund,  available  al 
ways  for  procuring  money — metallic  coin.  A  national 
debt  due  by  the  Government  is  a  very  different  founda 
tion  for  the  payment  of  the  notes  on  demand  from 
securities,  which  can  be  realised  at  once  in  the  open 
market.  The  want  of  an  actually  accumulated  fund, 


PAPER  CURRENCY.  95 

and  the  direct  and  undoubted  dependence  of  converti 
bility  on  a  vote  of  Congress,  capable  of  being  passed  at 
any  time,  would  render  convertibility  extremely  precari 
ous.  It  seems  to  me — though  under  the  intricate  com 
plications  which  beset  American  currency,  it  is  not  easy 
for  any  one  who  is  not  an  American  to  speak  with  confid 
ence — that  the  best  course  to  adopt  would  be  to  imitate 
the  English  system,  as  far  as  practicable ;  for  that  system 
works  admirably  in  England.  As  an  issue  of  paper  cur 
rency  it  is  irreproachable;  the  only  charge  brought  against 
it  which  deserves  a  moment's  notice  is  that  the  line  is 
drawn  too  low  at  fifteen  millions,  as  the  public  could  and 
would  hold  a  larger  quantity  without  ever  sending  any 
portion  of  it  for  payment.  That  accusation,  I  venture 
to  believe,  has  already  been  disposed  of  in  the  preceding 
pages.  To  intrust  the  issue  to  a  single  bank  under  the 
peremptory  condition  of  investing  all  that  it  receives  in 
Government  securities  would  probably  be  the  safest,  as  it 
would  be  the  simplest  plan;  for  it  might  be  very  difficult 
to  check  the  issues  of  many  banks,  and  to  acquire  a  well- 
founded  assurance  that  the  issues  never  exceeded  the 
amount  lodged  in  securities.  On  this  method  a  per 
manent  reserve  of  gold  must  be  provided  ;  this  would 
obviously  be  taken  from  the  sum  which  would  other 
wise  have  been  placed  in  securities.  A  portion  of  the 
profits  derived  from  the  securities,  would  of  course,  as 
already  argued,  be  appropriated  to  the  State.  I  do  not 
say  that  this  is  the  only  plan  open  to  the  United  States, 
but  to  the  best  of  my  judgment,  it  seems  to  be  the  best 


CHAPTER    III. 

WHAT  IS  A  BANK  ? 

WE  have  now  finished  the  discussion  of  currency  in  its 
strict  and  technical  sense.  We  pass  on  to  another 
agency  for  carrying  on  the  great  work  of  exchanging 
wealth,  for  exchanging  goods  made  to  be  consumed  by 
men  other  than  the  makers — to  banking.  As  currency 
has  no  other  function  than  this  exchange  of  wealth,  it 
follows  that  banking  and  currency  are  two  different 
machines  for  performing  the  same  work.  The  bank  and 
its  great  instruments,  the  cheque  and  the  bill  of  ex 
change,  transfer  the  ownership  of  wealth  from  one  man 
to  another.  But  banking  is  not  currency,  and  hopeless 
confusion  must  result  if  it  is  regarded  as  currency.  In 
deed  the  mixing  up  of  currency  with  banking,  by  refer 
ring  to  currency  as  the  cause  of  many  of  the  most  im 
portant  events  in  banking,  is  to  this  hour  the  fatal  source 
of  the  unintelligibleness  of  that  really  simple  matter,  cur 
rency.  The  practice  of  banking  leads  to  a  vast  diminution 
in  the  use  of  currency,  in  the  quantity  of  coin  and  bank 
notes  employed  ;  but  they  are  essentially  different  instru 
ments,  precisely  as  a  plough  drawn  by  horses  is  a 
different  tool  from  a  spade  worked  by  a  man,  though 
they  both  perform  the  same  service  of  digging  up  the 
ground.  What,  then,  is  a  bank  ?  In  what  does  it 


WHAT  IS  A  BANK  ?  97 

deal,  for  it  is  a  trade  ?     It  might  appear  that  these  are 
extremely  hard  questions  to  answer,  for  in  what  book 
or  speech  have  they  been  ever  answered  in  precise  and 
unmistakeable  terms  ?     Certainly  bankers  are  not  the 
persons  to  ask  what  they  deal  in,  as  one  might  ask  the 
same    question  of  a   grocer.      Everybody  replies — A 
bank  deals   in  money ;    people  take  money  to  a  bank 
and  procure  money  from  a  bank — what  can  be  clearer  ? 
A  banker  deals  in  money  as  a  grocer  deals  in  tea.     But 
is  that  so  ?      A  bank   that  issues  bank-notes  beyond 
doubt  so  far  deals  in  money,  but  the  issuing  of  bank 
notes  is  a  function  superadded  to  banking ;   very  few 
banks  issue  notes.    One  has  only  to  consider  that  nearly 
one  hundred  millions'  worth  of  banking   operations — 
that  goods  are  bought  and  paid  for  through  banks  to  this 
huge  amount  in  London  alone  without  a  single  sovereign 
or  a  single  bank-note  being  touched — to  perceive  that 
money,  true  money  that  is  handled  and  counted,  is  not 
the  staple  which  a  bank  deals  in,  although,  like  every 
other  business,  every  bank  does  touch  a  small  propor 
tion  of  money.     To  say  that  a  bank  deals  in  money  is 
one  of  the  most  unreal  assertions  that  can  be  made.     It 
compels  the  man  who  gives  such  an  account  of  banking 
to  call  a  cheque  and  a  bill   money,  and  if  these  are 
money,  then  farewell  to  any  possibility  of  understanding 
what  money  is.    Long  ago  I  stated  in  Frasers  Magazine 
that  probably  not  more  than   I   in  30  of  an  ordinary 
banker's  receipts  consisted  of  cash,  of  coin  and  notes. 


98  BANKS  DO  NOT  DEAL  IN  MONEY. 

This  conjecture  received  a  very  remarkable  confirma 
tion  from  an  analysis  made  by  Sir  John  Lubbock  of  a 
sum  of  £19,000,000  paid  in  to  his  banking  firm  in  the 
City.  It  was  composed  of 

Cheques  and  bills,  .         .         £18,395,000 
Notes,      ....  487,000 

Coin,        ....  118,000 

£19,000,000 

3  per  cent,  only  of  the  receipts  were  paid  in  cash,  and 
coin  constituted  only  y2  per  cent,  or  I  in  200,  of  the 
whole  sum.  Sir  John  Lubbock's  bank  has  not  cash, 
money,  for  its  staple,  for  the  article  it  deals  in.  If  that 
bank  does  anything,  it  is  not  with  sovereigns  and  bank 
notes  that  it  does  it.  It  handles  some  cash,  no  doubt, 
but  so  does  every  trader  and  every  man  in  the  country. 
To  use  money  furnishes  no  indication  of  a  man's  busi 
ness  ;  the  cash  handled  by  the  cashier  of  a  banker  is 
only  his  small  change  ;  it  tells  us  nothing  about  Sir 
John  Lubbock's  business.  If  we  wish  to  learn  what 
that  is  we  must  look  to  the  big  item  in  his  statement, 
the  97  things  which  make  up  the  bulk  of  his  receipts. 
Here  we  find  the  commodity  in  which  he  trades — bills 
and  cheques — some  of  which  he  receives,  some  he  pays. 
(To  understand  the  banker's  profession,  we  must  know 
about  bills  and  cheques,  what  they  are,  where  he  gets 
them  from,  what  he  does  with  them,  how  he  earns  a 
profit  out  of  them,  when  they  are  abundant  and  when, 
scarce,  and  what  makes  them  abundant  or  scarce,  j 
Many  would  say  that  they  are  easy  to  understand,  that 


WHAT  IS  A  BANK  ?  99 

they  represent  money,  but  I  decline  to  accept  the  word, 
represent,  in  currency,  for  I  cannot  understand  its  mean 
ing  there,  nor,  as  experience  has  taught  me,  does  anyone 
else ;  it  has  no  definite  meaning  for  anyone.  To  say 
that  bills  and  cheques  represent  so  much  money  no 
more  tells  me  what  they  are  than  when  I  hear  so  many 
sheep  and  oxen  described  as  representing  so  much 
money,  do  IS  learn  what  sheep  and  oxen  are.  Papers 
which  promise  or  order  money  to  be  given,  if  that  is 
the  sense  of  "  representing,"  cannot  be  money  itself ;  a 
promise  of  a  thing  does  not  give  it  in  hand.  The  thing, 
the  property,  is  absent.  \  Cheques  and  bills  may  do  the 
same  general  work  as  money,  but  so  do  spoken  words, 
which  may  purchase  goods  and  bind  a  man  at  law 
just  as  firmly  as  the  written  cheque.  What,  then,  are 
they  ?  Orders  to  pay  money  which  can  be  legally 
enforced,  title-deeds  to  money  which  can  insist,  under 
peril  of  a  Court  of  Law,  on  receiving  true  money,  but 
which  are  no  more  money  than  those  other  title-deeds 
to  money  which  are  contained  in  the  accounts  of  a 
shopkeeper's  books.  Cheques  and  bills  say  to  a  banker 
or  merchant — You  owe  me  money;  instead  of  paying 
it  to  me,  pay  it  to  the 'man  who  brings  this  piece  of 
paper  to  you.  f  A  cheque  on  a  bank  implies  a  debt 
due  by  the  banker,  or  a  willingness  of  the  banker, 
when  there  is  no  debt,  to  make  a  loan  of  a  sum  of 
money ;  a  bill  is  an  admission  by  the  acceptor  that 
he  owes  money  and  will  pay  it  on  the  stipulated  day. 


1OO          A  BANK  DEALS  IN  DEBTS. 

These  are  the  things,  the  97  out  of  100,  which  a  banker 
receives  ;  they  are  the  articles  he  deals  in.  He  deals  in 
debts ;  he  receives  debts,  and  his  business  is  to  collect 
payment  for  them  ;  his  customers  bring  him  their 
claims  to  collect  on  their  behalf.  So  far  the  business  of 
a  banker  is  identical  with  that  of  a  clerk  sent  round  by 
a  great  shopkeeper  to  collect  his  bills.  The  banker 
touches  no  money  worth  mentioning  on  the  side  of  his 
receipts  ;  if  he  handles  money,  it  must  be  when  he 
gathers  up  the  payments  due  on  these  cheques  and 
bills.  From  his  customers — called  depositors — he  gets 
only  ;£3  out  of  ;£iOO  in  money. 

Here  arises  the  question  :  In  what  form  does  the 
banker  obtain  payment  of  these  pieces  of  paper  for  his 
customers  ?  If  his  bank  is  in  the  City  of  London,  he 
will  not  touch  a  single  pound  of  money  in  the  collection 
of  these  debts.  They  will  all  be  sent  to  the  Clearing 
House,  where  a  list  is  drawn  up  several  times  a  day  of 
the  cheques  sent  in  against  and  those  sent  in  in  favour 
of  each  banker  who  is  a  member  of  the  Clearing  House. 
A  balance  fs  struck  for  each.  Those  who  have  to  pay 
it  give  a  cheque  on  the  Bank  of  England  to  those  who 
have  to  receive  it,  and  the  whole  affair  is  settled.  If,  on 
the  contrary,  the  banker  has  his  bank  in  a  locality  where 
there  is  no  Clearing  House,  as  at  the  West  End  or  at 
Liverpool,  then  no  doubt  he  must  be  paid  in  cash  over  the 
counter,  but,  as  we  shall  see  presently,  this  makes  him  no 
more  a  dealer  in  money  than  his  fellow  banker  in  the  City. 


WHAT  IS  A  BANK?  IOI 

We  see  then  what  are  a  banker's  receipts, — an  insig 
nificant  quantity  of  cash,  and  all  the  rest  debts,  ex 
pressed  on  paper,  which  he  undertakes  to  collect. 
These  are  his  resources — the  staple  in  which  he  deals,— 
debts.  What  does  he  do  with  them  ?  which  means, — 
How  is  it  that  at  the  Clearing  House  he  may  send  in 
cheques  for  £100,000,  and  is  paid  with  a  cheque  on  the 
Bank  of  England  for  perhaps  £50?  Manifestly,  he 
does  not  collect  money  and  send  it  round  to  each  of 
his  customers  for  whom  he  undertook  to  collect  it. 
That  would  not  be  banking,  it  would  be  a  mere  col 
lecting  agency.  The  real  question  is,  How  comes  it 
to  pass  that  he  has  a  right  to  receive  £100,000  from 
the  Clearing  House,  and  is  paid  only  £  50  ?  What  are 
these  counter  claims  against  him  which  have  reduced 
his  payment  to  such  a  trifle  ?  They  are  claims  of  his 
own  making.  He  knows  that  he  would  have  a  right  to 
receive  £  100,000  at  the  Clearing  House,  but  he  does  not 
want  to  receive  this  sum  in  money.  The  money  would 
be  useless  to  him,  it  would  do  him  no  good.  Instead 
of  that  he  finds  borrowers,  who  seek  means  wherewith 
to  make  purchases.  He  bids  them  buy  the  goods  they 
desire  and  pay  for  them  with  cheques  drawn  upon  his 
bank.  The  purchases  are  made,  the  cheques  are  sent 
by  the  sellers  of  the  goods  to  the  Clearing  House 
against  him,  they  are  placed  against  those  he  has  to 
receive,  and  the  end  of  the  whole  affair  is  that  he 
carries  off  a  cheque  of  £50  on  the  Bank  of  England. 


IO2         INACCURATE  CITY  TALK  ABOUT  MONEY. 

The  nature  of  banking  now  stands  forth  quite  clear. 
A  banker  is  a  man  who  collects  debts  from  one  set  of 
persons  and  employs  the  proceeds  in  granting  loans  to 
another  set.  He  receives  debts  from  his  customers,  he 
creates  debts  against  his  borrowers.  Thus  he  deals  in 
debts.  Nominally  he  deals  in  money,  because  all  these 
debts  are  stated  in  money ;  but  practically  and  really 
he  deals  in  money  which  is  due,  but  not  touched,-  in 
claims,  debts,  transferred  from  one  account  to  another. 
Hence  in  my  "Lectures  on  the  Principles  of  Currency," 
I  defined  a  bank  to  be  an  institution  for  the  transfer  of 
t-debts,  and  the  definition  is  true.  But  a  still  better  one 
can  be  given,  which  brings  out  into  clearer  light  the  true 
nature  of  a  bank,  its  essential  function,  and  draws  away 
attention  from  the  movements  of  its  machinery,  its 
paper  receipts  and  paper  payments  with  the  trifling  ac 
companiment  of  gold,  and  fixes  it  on  the  realities  which 
generate  them.  This  definition  will  be  derived  from 
the  cardinal  question,  How  these  debts,  which  are  the 
receipts  and  resources  of  a  bank,  and  those  other  debts 
which  it  creates,  are  born  into  the  world  ?  For  a  right 
apprehension  of  this  vital  matter,  the  exclusive  talk 
about  money  in  connection  with  banks  is  most  mis 
chievously  misleading.  People  are  ever  saying  of  the 
banks  that  money  is  abundant  or  scarce,  money  is  dear 
or  cheap.  This  language  is  freely  used  by  men  who 
are  accounted  great  authorities,  yet  it  is  most  inac 
curate  and  untrue.  It  is  the  unthinking  abbreviation, 


WHAT  IS  A  BANK  ?  ;   1 03 

the  mere  slang  of  the  City.  Banking  transactions  may 
be  enormously  increased  or  diminished  witfaoiri;  any 
change  in  the  quantity  of  money  circulating.  Wh%rr- 
banks  have  much  to  lend,  it  is  not  gold  or  cash,  for 
that  is  not  the  thing  lent,  but  something  else  which  we 
must  try  to  discover.  Again,  when  money  is  called 
cheap  or  dear,  the  words  express  a  falsehood,  for 
money  (sovereigns)  is  dear  and  cheap  solely  accord 
ing  as  the  gold  of  which  it  is  made  is  cheaper  or 
dearer  as  a  commodity  in  the  metal  market.  What 
the  City  really  means  is  that  the  borrowing  of  money 
is  cheap  or  dear;  but  a  payment  given  for  the  loan 
of  a  commodity  is  something  utterly  different  from  the 
cost  of  the  commodity  itself.  The  hire  of  a  hunter  for 
a  day's  gallop  is  not  the  hunter  himself. 

How  then  do  cheques  and  bills  come  into  exist 
ence  ?  They  are  the  offspring  of  sales.  There  are, 
it  is  true,  many  cheques  and  bills  drawn  between 
bank  and  bank  which  are  not  the  immediate  progeny 
of  sales  of  goods  ;  but  they  do  not  come  into  con 
sideration  here.  They  are  mere  distributions  among 
the  several  banks  of  a  common  stock.  The  origin  of 
that  common  stock  is  what  we  are  here  concerned 
with  in  discovering.  These  paper  documents — every 
one  of  them — at  their  origin  denote  property  bought 
and  paid  for,  either  by  the  transfer  of  a  debt  or  a 
promise  to  pay  later.  Every  man  who  gives  a  cheque 
to  a  banker  has  previously  sold  something,  charged  his 


IO4        A  BANK  AN  INSTRUMENT  OF  EXCHANGE. 

banker  to  collect  the  payment  for  him,  and  then  he  in 
turn  buys  and  orders  the  banker  to  pay  for  the  pur 
chase  with  that  previous  cheque  he  deposited.  People 
who  receive  their  income  in  cheques  or  warrants — 
without  sales  effected  by  themselves — fall  under  the 
universal  law.  If  their  income  is  derived  from  a 
tenant's  rent,  or  a  railway  dividend,  or  a  dividend 
on  consols — in  every  case  alike,  property  has  been  sold 
to  generate  the  cheques ;  corn  and  hay,  or  a  seat  in  an 
expensive  railway  carriage,  or  goods  wherewith  to  pay 
taxes,  have  been  sold  ;  there  is  no  exception  whatever. 
The  conclusion  then  is  clear;  the  resources  of  banks  pro 
ceed  from  goods  sold,  of  which  they  collect  the  payment. 
On  the  other  side,  the  counter-cheques  at  the  Clearing 
House  denote  goods  bought  at  some  time  or  other.  Fur 
ther,  it  is  perfectly  plain  that  the  power  to  buy  these 
second  goods  with  the  cheques  which  the  banker  has 
authorised  his  borrower  to  draw  is  the  consequence  of 
the  sale  of  the  first  goods,  whose  seller  has  received  a 
cheque  and  deposited  it  with  his  banker.  Thus  the 
cardinal  and  final  truth  comes  out,  that  one  set  of  goods 
has  been  exchanged  for  another  —  that  goods  have 
bought  goods  —  that  the  banker  has  acted  precisely 
like  a  sovereign,  has  been  a  tool,  an  instrument  of 
exchange.  He  transfers  purchasing  power,  which  he 
received  in  the  form  of  a  debt  to  collect,  and  passes 
it  on  in  the  form  of  a  debt  he  creates.  That  purchasing 
power  resides  in  the  goods  sold,  directly  or  indirectly, 


WHAT  IS  A  BANK  f  105 

by  the  banker's  depositor.  It  is  because  the  depositor 
has  sold  corn  that  the  banker  is  enabled  to  authorise 
the  merchant  to  buy  tea. 

This  process,  of  course,  implies  that  the  man  who 
deposits  the  debts  to  collect  does  not  himself  buy  as 
much  as  he  has  sold,  for  in  that  case  the  banker  would 
have  nothing  to  lend.  The  counter-cheques  at  the 
Clearing  House  would  be  those  of  his  own  depositor ; 
he  could  not,  in  such  a  case,  seek  out  a  borrower  and 
earn  a  profit  on  a  loan  wanted  by  him.  This  would 
not  be  banking,  but  only  a  mere  collecting  agency. 
It  is  because  the  farmer  does  not  buy  to  the  full  value 
of  the  corn  he  has  sold  that  the  banker  has  the  means 
of  authorising  the  merchant  to  buy  tea;  in  other 
words,  to  exchange  corn  for  tea.  The  cheques  given 
for  the  corn  appear  at  the  Clearing  House  in  favour 
of  the  banker ;  against  them  there  are  the  cheques 
drawn  by  the  farmer  for  what  he  has  himself  bought, 
and  the  other  cheques  which  the  tea-merchant  drew  on 
the  banker  upon  the  authority  given  him  by  the  latter. 
These  two  sets  of  cheques  drawn  against  the  bank  will 
not*  equal  the  cheque  paid  in  to  him  by  the  farmer ;  he 
will  reserve  a  portion  to  remain  at  the  bank  in  cash.  Of 
this  more  presently. 

The  nature  of  banking  now  stands  completely  re 
vealed  ;  through  its  agency  corn  has  been  exchanged 
for  tea ;  that  was  its  function.  Each  of  these  articles 
has  passed  into  different  hands ;  the  bank  was  invented 


io6     A  BANKER'S  RELATION  TO  HIS  PRINCIPALS. 

to  perform  this  service.  The  two  substances,  corn  and 
tea,  and  two  debts — one  due  to  the  farmer,  the  second 
due  to  the  banker — constitute  the  whole  affair.  Thus 
we  learn  that  a  bank  is  an  intermediate  agent,  worked, 
in  every  case,  by  two  persons,  such  as  the  farmer  and 
the  tea-merchant,  and  so,  in  actual  reality,  we  obtain 
the  definition,  a  banker  is  a  broker  between  two  prin 
cipals.  In  our  supposed  case  one  principal  is  the 
farmer.  He  has  sold  corn,  this  gives  him  power  to  buy. 
A  part  of  that  power  he  himself  exercises  by  purchasing 
supplies  for  his  farm  ;  the  remainder  he  does  not  require 
to  use,  say  for  three  months.  He  might  lend  this  surplus 
power  himself  to  some  borrower  who  applied  to  him 
personally,  but  he  prefers  to  employ  an  agent  called  a 
banker,  and  requests  him  to  select  the  man  to  whom  this 
purchasing  power  shall  be  lent  for  three  months.  This 
the  banker  undertakes  to  do,  and  selects  a  tea-merchant 
who  wants  to  buy  tea,  but  has  not  the  means  to  do  so 
ready  at  hand.  *  Thus  the  true  lender  is  the  farmer;  the 
banker  is  his  broker,  who  finds  a  borrower,  and  puts  him 
into  direct  connection  with  the  farmer.  The  banker  is  a 
broker  between  the  two  principals,  the  farmer  and  the  tea- 
merchant,  and  the  article  corresponding  to  sugar  in 
Mincing  Lane,  of  which  the  banker  is  the  broker,  is 
purchasing  power,  lodged  in  a  debt  to  collect.  There 
need  not  necessarily  be  a  shilling  of  money  engaged  in 
the  whole  affair,  though  many  shillings  and  pounds  may 
have  been  mentioned  in  it. 


WHAT  IS  A  BANK  ?  1 07 

The  great  value  of  this  definition  of  banking  consists 
in  its  bringing  out  the  most  characteristic  quality  of  the 
banker,  that  he  is  only  an  intermediate  agent.  His  sole 
action  is,  like  a  coin,  to  place  property  in  different  hands. 

This  analysis  further  teaches  us  the  cardinal  truth, 
that  the  great  events  of  banking,  the  abundance  or 
scarcity  of  its  resources,  its  ability  to  assist  trade,  low  or 
high  rates  of  discount,  panics  and  crises,  are  to  be  found, 
not  in  banks  and  bankers,  but  in  the  state  of  the  wealth 
of  the  country,  and  in  the  effects  which  it  produces  on 
the  two  principals  whom  the  bank  has  brought  together. 
There  is  no  truth  in  banking  and  the  money-market 
more  central  than  this,  none  that  requires  to  be  more 
deeply  impressed  on  the  mind  of  every  trader  and 
every  banker.  Yet  the  part  which  the  banker  proper 
plays  in  banking  is  vastly  important.  He  it  is  who 
selects  the  men  into  whose  hands  the  wealth  moved  by 
his  agency  is  to  be  committed.  He  neither  created  the 
wealth  which  his  depositors  sold,  nor  does  he  touch  that 
other  wealth  which  his  borrowers  purchase ;  but  it  signi 
fies  immensely  to  what  sort  of  borrowers  he  gives  the 
means  of  buying,  by  empowering  them  to  draw  cheques 
upon  his  bank.  On  him  mainly  depends  whether  the 
men  who  acquire  the  wealth  of  the  nation  will  employ 
it  wisely,  and  preserve  it  by  making  use  of  it  as  capital 
in  processes  which  reproduce  its  consumption,  or  to 
men  who  will  waste  and  destroy  it  in  prodigal  ex 
penditure,  or  in  unskilful  trade,  or  in  reckless  specu- 


IO8        INCORPOREAL  WEALTH  A  PURE  FICTION. 

lations  in  mines,  or  in  making  railways  in  the  wilds 
which  cannot  for  a  long  period  of  years  reproduce  to 
the  country  the  food,  clothing,  and  materials  which 
their  construction  consumed.  This  is  the  sole  range 
of  the  banker's  action — his  selection  of  the  men  to 
whom  the  country's  wealth  shall  be  entrusted  ;  and  it 
is  a  mighty  one.  He  possesses  no  capital,  though  all 
commercial  and  monetary  literature  ascribes  capital  to 
bankers.  Lines  and  names  in  their  ledgers,  cheques  at 
the  Clearing  House,  debts  due  to  depositors,  debts  due 
to  the  bankers  by  those  who  obtained  from  them  loans 
and  discounts,  are  not  wealth  nor  capital.  Incorporeal 
property  is  a  pure  fiction,  except  as  a  legal  right — that 
is,  a  collection  of  words,  spoken  or  written,  which  will 
persuade  a  Court  of  Law  to  order  the  Sheriff  to  put 
goods,  substances,  into  the  possession  of  a  particular 
man.  If  a  title-deed  to  wealth  is  the  wealth  itself,  if  a 
mortgage  on  an  estate  is  the  estate  itself,  then  commer 
cial  science  and  Political  Economy  should  be  thrown 
into  the  waste-basket  at  once  as  worthless  and  time- 
wasting  nonsense. 

But,  it  will  be  said,  when  bankers'  balances  are  de 
scribed  as  capital,  all  that  is  meant  is  that  unemployed 
capital  in  the  nation,  seeking  employment,  is  abundant 
or  scarce.  Then  why  use  false  and  misleading  language  ? 
Does  not  Political  Economy  groan  enough  already  under 
the  load  of  common  words  needlessly  travestied  ?  Why 
fix  attention  on  the  banks  as  the  actual  owners  of 


WHAT  IS  A  BANK  ?  IOQ 

capital,  instead  of  on  their  two  principals,  tKe  farmer 
and  his  brother-depositors,  and  on  the  causes  which 
may  determine  them  to  place  a  larger  or  a  smaller  part 
"of  the  proceeds  of  their  sales  in  their  banker's  hands, 
and  on  those  who  have  acquired  possession  of  wealth  by 
the  purchasing  power  lent  them  by  the  bankers,  whether 
they  are  increasing  or  diminishing  the  wealth  thus  put 
at  their  disposal  ?  This  is  a  most  serious  matter ;  for 
on  it  depends  whether  currency  and  banking  will  be  ever 
understood  by  the  world.  Those  whose  ears  are  filled 
with  this  kind  of  phraseology  will  rarely  be  acquainted 
with  the  forces  of  the  banking  world  they  live  in. 

The  banker  is  a  broker  between  two  principals,  but 
he  differs  in  one  important  detail  from  an  ordinary 
broker.  In  Mincing  Lane  the  broker  finds  a  buyer  for 
the  tea  merchant ;  there  his  action  ends.  He  charges 
a  commission  for  the  service  he  has  rendered,  and  with 
draws.  Not  so  the  banker :  he  does  one  thing  more, 
and  it  leads  to  extensive  consequences.  He  guarantees 
the  solvency  of  the  borrower  whom  he  finds  for  the  de 
positor,  He  chooses  the  man  who  shall  buy  in  the  stead 
of  the  farmer,  and  does  not  even  declare  his  name. 
The  deposit  of  purchasing  power  passes  wholly  into  his 
own  hands,  but  on  one  most  serious  condition,  that  he 
shall  return  it  to  the  depositor  on  demand.  He  has 
lent  means  to  the  tea  merchant  which  belong  to  the 
farmer,  and  the  farmer  may  ask  for  them  back  at  any 
time.  This  fact  presents  a  grave  difficulty.  It  is  im- 


HO  ORIGIN  OF  BANKING  RESERVES. 

possible  that  a  tea  merchant,  still  less  a  manufacturer, 
should  purchase  tea  or  cotton  with  funds  that  he  may 
be  required  to  repay  at  any  moment.  On  such  a  con 
dition,  banking,  so  far  as  it  lends  means  to  traders, 
would  be  impracticable  :  a  banker  would  be  reduced  to 
the  necessity  of  investing  the  farmer's  purchasing  power 
in  buying  Exchequer  bills,  or  Government  bonds,  cap 
able  of  being  resold  at  any  time  without  any  probable 
loss.  But  experience  teaches  him  that  he  is  under  no 
such  necessity.  He  discovers  that  in  ordinary  times, 
with  a  large  number  of  depositors,  demands  for  imme 
diate  repayment  of  deposits  are  subject  to  a  general  law 
of  average  on  which  he  may  safely  rely,  and  that  average 
falls  far  short  of  his  receipts.  If  one  depositor  suddenly 
runs  his  account  down  very  close,  other  depositors  are 
found  to  be  coming  in,  without  any  probability  of  early 
cheques  for  repayment  being  drawn  by  them.  On  this 
fact,  revealed  by  experience,  the  banker  is  entitled  to 
place  the  same  confidence  as  a  Life  Assurance  Com 
pany  has  to  build  on  tables  of  the  average  rate  of 
mortality ;  and  he  further  establishes  an  understanding 
with  his  depositors  that  they  shall  generally  leave  a  fair 
balance  in  his  hands. 

This  fluctuation  in  the  cheques  drawn  upon  him  by 
his  depositors  exposes  the  banker  at  all  times  to  pay 
on  a  given  day  more  than  he  receives,  and  thus  com 
pels  him  to  provide  a  certain  amount  of  cash  ready 
in  hand  to  provide  for  such  a  contingency.  He  is 


WHAT  IS  A  BANK  ?  Ill 

consequently  unable  to  lend  all  that  he  receives.  He 
cannot  authorise  borrowers  to  \draw  cheques  on  him 
to  the  full  amount  of  those  he  has  to  collect ;  the 
difference  will  reach  him  in  cash  ;  that  cash  he  keeps 
as  a  reserve  against  sudden  demands.^  That  reserve 
furnishes  him  with  protection  against  the  risk  of 
committing  an  act  of  insolvency  by  being  unable  to 
obtain  back  his  loans  as  fast  as  his  depositors  demand 
repayment.  It  might  be,  indeed  almost  always  is,  a  ques 
tion  of  time.  He  has  lent  on  terms  more  or  less  long. 
The  bills  he  has  discounted  may  be  perfectly  sound,  but 
they  are  not  yet  due.  He  may  possess  much  wealth,  but 
it  is  not  accessible  at  the  moment,  or  the  man  to  whom 
he  has  made  a  loan  may  not  be  ready  to  repay. 
Security  against  this  danger,  inherent  in  modern  bank 
ing,  is  the  object  of  the  reserve. 

f  The  magnitude  of  the  reserve,  which  prudence  coun- 
sel§  every  banker  to  provide,  is  a  question  of  great  prac 
tical  importance.)  The  reserve  entails  a  diminution  of 
the  banker's  profits  ;  it  is  coin  and  banknotes  not  used, 
but  kept  in  store ;  hence,  he  has  a  strong  motive  of 
interest  to  make  that  reserve  as  small  as  possiblej 
Still  safety  is  the  paramount  consideration.  How  large 
a  reserve  then  ought  a  banker  to  keep  ?  That  will  vary 
with  the  particular  circumstances  of  each  bank.  A 
bank  in  a  quiet  agricultural  district,  fed  by  rich  land 
owners  and  steady  farmers,  whose  habits  are  regular  and 
well-known,  will  be  safe  with  an  exceedingly  small 


112  SOLE  LAW  OF  A  RESERVE. 

reserve.  A  bank  in  London  or  New  York,  whose  de 
positors  are  engaged  in  wide  commercial  operations, 
liable  to  heavy  and  sudden  losses,  dealing  with  distant 
markets,  and  are  exposed  to  unexpected  contingences, 
such  a  bank  will  require  a  reserve  of  much  larger  dimen 
sions,  relatively  to  the  amount  of  the  business  which  it 
transacts.  Thus  there  is  no  fixed  rule  for  the  size  of  a 
reserve;  it  is  a  matter  for  the  intelligence  and  judgment 
of  each  banker.  But  in  every  case — and  this  is  the 
supreme  point — safety,  protection  against  being  found 
actually  without  the  cash  imperatively  demanded  by 
depositors,  is  the  one  sole  reason  for  the  existence,  the 
one  sole  law  for  the  management  of  the  reserve.  No 
other  reason  can  be  assigned  that  will  bear  a  moment's 
consideration.  Everything  which  is  urged  in  support  of 
a  reserve,  which  pleads  some  other  law  of  the  reserve, 
resolves  itself  ultimately  into  the  absurdity  of  the  Mer 
cantile  Theory,  that  it  is  a  good  thing  for  a  country  to 
import  gold  into  a  country  for  the  gold's  sake,  to  be  kept 
like  jewels  locked  up  in  a  wardrobe  and  never  worn, 
— bought  at  a  large  cost,  and  sentenced  to  utter  useless- 
ness,  so  far  as  it  is  in  excess  of  the  demand  for  small 
change  which  society  requires,  and  of  the  need  of  re 
serves  of  reasonable  amount. 

In  a  nation  whose  trade  is  spread  over  the  whole 
world,  such  as  England,  and  must  necessarily  encounter 
the  varying  circumstances  of  many  countries,  bad 
harvests,  wars  diminishing  industry,  foreign  commotions 


WHAT  IS  A  BANK  ?  113 

striking  down  the  supply  of  a  chief  material  of  industry, 
such  as  cotton,  trade  must  fluctuate,  and  along  with  trade 
the  funds  at  the  disposal  of  banks.  Thus  the  equili 
brium  between  receipts  and  lendings  becomes  a  matter 
demanding  high  intelligence  and  skill  from  every  banker. 
His  reserve  must  vary,  at  times  enormously.  It  is  natural 
that  he  should  watch  it  with  a  jealous  eye.  His  reserve 
is  composed  of  gold  and  notes ;  and  when  he  finds  them 
diminishing,  what  more  natural  than  that  he  should, 
believe  that  there  are  too  few  notes  and  too  little  gold 
in  circulation  ?  Give  England  more  gold,  cry  her 
bankers,  and  her  reserves  will  be  strong :  get  more  gold 
and  notes  into  circulation,  exclaim  trembling  merchants 
in  England  and  America,  and  bankers  will  have  more 
to  lend  us  and  on  cheaper  terms.  That  is,  in  fact,  to  say- 
operate  on  three  parts  in  a  hundred  of  the  resources  of 
banks,  and  there  will  be  plenty  to  lend  and  discount  will 
be  easy,  even  though  banking  may  carry  out  its  transac 
tions,  without  money,  in  a  single  city  to  the  extent  of  one 
hundred  millions  of  pounds  a  week.  Such  a  doctrine  is  an 
absurdity  on  the  face  of  it.  Anxious  banking  and  high 
rates  of  discount  are  shown  by  facts  to  accompany  often 
large  reserves  and  an  expanded  circulation.  The  gold 
in  the  bank  cannot  be  lent,  and  is  not  lent,  the  urgent 
needs  of  traders  notwithstanding.  The  fact  is  clear  for 
one  who  understands  the  nature  of  currency.  Coin  and 
notes  are  wanted  for  those  transactions  which  are  effected 
by  their  agency  ;  and  these  are  insignificant  trifles  com- 


114  EXCESS  OF  MONEY  CANNOT  BE  USED. 

pared  with  the  transactions  carried  out  by  the  agency  of 
banking.  The  transactions  in  both  cases  are  exchanges  of 
goods;  and  it  is  in  what  is  happening  to  goods,  to  property, 
and  not  in  what  is  happening  to  the  tools  that  move  their 
ownership,  be  they  metal  or  cheques,  that  we  must  seek 
for  the  causes  of  these  anxious  times  and  elevated  dis 
count.  More  gold  from  Australia,  more  notes  issued, 
beyond  what  there  is  a  specific  demand  for  to  be  used, 
go  into  the  vaults  and  tills  ;  they  cannot  be  issued,  and 
are  not,  whatever  may  be  the  pressure  in  the  money 
market.  But  this  is  a  fact  which  banking  oracles  steadily 
refuse  to  perceive.  It  is  perfectly  possible — and  it  has 
happened  over  and  over  again — that  a  very  tight  money 
market  with  a  severe  rate  of  discount,  or  that  an  easy 
money  market  with  a  very  low  rate,  should  co-exist 
with  the  same  amount  either  of  circulation  or  of  cash 
reserve.  The  gold  flowed  in  or  out,  as  the  balance  of 
trade  or  the  payment  on  debts  due  by  foreign  countries 
required,  or  as  the  miners  chanced  to  send  it  to  England 
in  scarcity  or  abundance  ;  but  these  same  causes  may 
and  do  go  along  with  pressure  or  ease  in  the  City. 

The  important  matter  for  a  banker  to  study  is  not 
the  movements  up  or  down  of  his  reserve,  regarded  as 
isolated  facts,  but  the  forces  which  are  acting  on  that 
reserve,  if  he  desires  to  learn  the  present  state  and  the 
future  prospects  of  the  banking  world.  It  is  not  the 
figure  at  which  the  reserve  stands  which  will  instruct 
him,  but  the  causes  telling  on  his  receipts  and  his 


WHAT  IS  A  BANK  ?  115 

loans.  Banking  is  substantially  the  conversion  of  re 
ceipts  into  loans  :  what  his  receipts  are  and  are  likely  to 
be,  what  loans  he  may  safely  make,  and  what  is  his 
position  as  to  the  repayment  of  loans  already  made,— 
this  inquiry  will  disclose  to  the  banker  where  he  stands. 
When  banking  effects  the  exchanges  of  more  than  one 
hundred  millions  of  pounds  worth  of  property  in  a  single 
week  in  a  single  locality  by  means  of  loans  on  paper, 
it  is  perfectly  idle  to  affirm  that  its  operations,  its 
danger  or  safety,  its  abundance  or  poverty,  turn  upon 
the  presence  or  the  absence  of  a  million  or  two  of  gold 
in  the  vaults  of  the  Bank  of  England.  Granted,  if  there 
is  a  run  on  the  bank  from  any  cause,  the  presence  of  a 
spare  million  acquires  immense  importance,  as  lately 
happened  to  the  Bank  of  San  Francisco — and  I  freely 
admit  that  to  the  extent  of  the  gold  being  actually  wanted 
to  face  a  run,  not  a  word  is  to  be  said  against  the  policy 
of  a  reserve.  To  that  extent  a  reserve  ought  ever  to  be 
maintained  :  it  is  gold  really  at  work,  just  as  the  coin 
in  a  shopkeeper's  till  to  give  change  to  his  customers. 
And  if  the  language  of  City  articles,  and  Economical 
journals  means  strictly  this — that  there  is  a  danger  of  a 
run  on  the  bank,  and  that  the  bank  may  come  to  a 
stoppage  for  want  of  gold — then  it  is  rational  and 
logical,  and  open  to  no  objection  except  on  the  score  of 
the  fact  observed  being  otherwise.  But  that  is  notori 
ously  what  the  oracles  of  the  money  market  do  not 
mean.  They  mean  that  the  increase  or  diminution  of 
6 


I  1 6    ISSUE  OF  LIFE  OR  DEATH  NOT  IN  THE  RESERVE. 

gold  in  the  Bank  of  England  is  and  ought  to  be  the 
regulator  of  the  rate  of  interest,  not  because  the  safety 
of  the  Bank  is  imperilled,  and  it  may  have  to  stop  pay 
ment — (that  is  too  ridiculous  to  write,  if  the  Bank's 
debtors  are  sound  and  its  property  uninjured) — but 
because  of  confidence,  or  the  necessity  of  having  some 
rule,  even  if  it  be  one  of  thumb,  or  any  other  unscien 
tific  and  arbitrary  reason.  The  vital  matters  for  a  bank 
are  always  the  state  of  its  depositors  and  the  state  of 
its  borrowers.  Are  deposits  likely  to  increase  or  fall 
off,  are  profits  or  losses  going  on  in  the  nation  which 
will  act  on  these  deposits,  are  the  bank's  loans  and 
advances  safe,  or  have  they  been  granted  to  persons 
who  have  injured  or  destroyed  the  property  which  they 
bought  with  them  ?  If  the  banker's  borrowers  are  good 
men,  still  will  they  repay  the  loans  as  fast  as  his  deposi 
tors  may  be  drawing  cheques  on  the  bank  ?  These  are 
the  issues  of  life  or  death  to  a  banker,  and  not  whether 
his  reserve  is  a  little  stronger  or  a  little  weaker.  The 
state  of  the  gold,  of  itself  alone,  can  give  no  answer 
to  these  questions.  The  answer  must  come  from  the 
forces  acting  on  the  two  principals  of  the  banker. 

Recently,  in  June  1875,  the  money  market  of  London 
was  on  the  very  brink  of  a  real  panic.  The  great 
Joint  Stock  Banks  of  the  City  discovered  that  they  had 
made  losses  that  were  roughly  estimated  at  half  a 
million,  for  one  of  them  alone.  Soon  after  the  reality 
of  the  disorder  was  disclosed  by  dividends  halved  from 


WHAT  IS  A  BANK  ?  1 1  7 

their  usual  rates,  and  by  enormous  sums  set  down  to  the 
loss  account.  Was  it  deficiency  of  gold  at  the  Bank  of 
England  that  brought  upon  these  banks  such  harm  and 
such  danger  ?  Quite  the  contrary — the  reserve  at  the 
bank  was  exceptionally  high — upwards  of  ten  millions 
— in  a  few  days  it  grew  to  beyond  thirteen.  The  real 
ca,use  was  a  banking  cause,  not  the  dead  uselessness  of 
the  idle  gold.  The  disaster  lay  in  bills,  in  the  banking 
carried  on  by  the  bankers  in  the  department  entirely 
under  their  control — in  the  lending  out  of  their  deposits. 
They  had  discounted  a  large  mass  of  worthless,  and,  it 
was  alleged,  dishonest  bills.  In  other  words,  their 
banking  had  been  bad.  They  had  received  from  de 
positors  a  power  of  buying  which  they  had  transferred  to 
unsound  borrowers.  These  borrowers  had  with  this 
power  purchased  property,  and  then  wasted  or  lost  it, 
and  could  not  repay  these  loans  to  the  banks,  when  the 
banks  had  to  repay  their  depositors.  What  had  gold  at 
the  Bank  of  England,  be  it  much  or  little,  to  do  with 
this  disturbance,  with  its  cause  or  its  cure  ?  The  gold 
was  in  large  supply — it  went  on  increasing  as  the  ruin 
ous  facts  were  discovered,  and  the  money  market  was 
in  great  terror — interest  instead  of  rising  fell — but  the 
banks  lost  huge  sums.  They  paid  away  their  dividends 
to  their  depositors  instead  of  to  their  shareholders — and 
so  ended  the  matter.  The  state  of  the  reserve  never 
came  into  account  at  all. 

It  is  hard,  no  doubt,  to  investigate  so  vast  a  field  as 


I  1 8       BANKS  AS  SAFE  IN  SUMMER  AS  IN  WINTER. 

the  commercial  life  of  a  nation  whose  transactions  cover 
the  whole  globe,  but  on  no  other  tenure  is  safe  banking 
possible.  If  the  banks  of  England  are  acted  upon  by 
receipts  and  withdrawals  generated  by  trading  events 
which  may  happen  in  "  China  or  Peru,"  the  bankers 
must  study  what  is  passing  abroad  in  reference  to  their 
business,  or  they  must  abandon  it  to  mere  chance.  TJie 
gold,  by  itself,  will  explain  nothing ;  it  will  not  tell 
whether  they  are  safe  or  in  danger. 

One  conclusion  to  be  drawn  from  these  considerations 
is  tha^the  tendency  of  a  reserve  to  increase  or  diminish 
is  of  far  greater  importance  to  study  than  its  actual 
figures.  JThe  anxious  question  always  is  how  far  the 
diminution  will  extend,  to  what  lengths  the  demands  of 
depositors  for  repayment  and  the  failures  of  borrowers 
to  meet  their  engagements  will  proceed.  The  object  to 
be  discovered  is  not  how  much  currency  'is  moving 
about — that  may  vary  exceedingly  without  having  any 
importance  for  banking.  For  instance,  the  circulation 
is  always  much  larger  in  summer  than  in  winter ;  more 
is  wanted  for  the  harvest  and  for  travelling ;  but  will 
anyone  Venture  to  say  that  banks  are  not  so  safe  in 
summer  as  in  winter,  or  that  this  is  a  reason  why  the 
rate  of  interest  should  be  higher  at  one  period  than  at 
the  other  ?  Has  any  sane  man  ever  put  his  name  to 
such  nonsense,  however  much  the  fact  itself  may  have 
been  put  forward  by  City  articles  ?  The  causes  which 
act  on  banks  relate  to  capital  exclusively,  to  the  in- 


WHAT  IS  A  BANK?  I  19 

fluences  increasing  or  diminishing  wealth.     Banking  is 
an  agency  between  lenders  and  borrowers  of  wealth. 

But  this  is  not  the  view  taken  by  the  City,  and 
those  who  speak  on  banking.  They  set  up  a  different 
theory,  if  that  can  be  called  theory  which  is  composed 
of  affirmation  only  ;  they  hold  that  the  amount  of 
the  reserve  of  the  Bank  of  England  scientifically  -v 
ought  to,  and  practically  does,  govern  the  rate  of  dis 
count.  Why  it  should,  they  do  not  explain,  nor  will 
they  ever  be  able  to  explain,  for  there  is  nothing  to 
connect  these  two  facts  together,  as  cause  and  effect, 
but  the  imagination.  There  is  always  a  certain  mystery 
as  to  the  future  of  a  vast  commerce.  When,  therefore, 
the  idea  has  seized  upon  the  minds  of  men  that  an  out 
flow  from  the  Bank  is  leading  to  a  diminution  of 
resources,  and  morning  after  morning  city  articles 
announce  that  so  much  gold  has  left  the  Bank,  a  vague 
unreasoning  alarm  springs  up  which  hastens  the  fulfil 
ment  of  the  disaster  it  apprehends.  Hard  times  are 
fancied  to  be  approaching,  and  lenders  take  advantage 
of  the  feeling,  and  make  difficulties,  and  exact  harder 
terms — and  they  obtain  them,  because  the  frightened 
trading  public  thinks  it  natural  that  it  should  pay 
more.  That  the  Directors  of  the  Bank  of  England 
should  deliberately  determine  at  what  point  the 
Bank  begins  to  be  in  real  danger  of  not  being 
able  to  find  gold  demanded  is  conceivable,  though 
I  do  not  believe  that  for  many  long  years  they 


I  2O    TRADERS  VICTIMISED  BY  THE  RESERVE  THEORY. 

ever  did  anything  of  the  kind.  But  that,  when  on 
every  conceivable  supposition,  the  limit  of  danger 
has  long  been  left  behind — when  the  proportion  of 
reserve  to  liabilities  has  reached  some  preposterously 
high  figures — that  in  such  a  case  the  loss  of  a  million 
or  two  of  gold,  of  itself  alone,  independently  of  what 
the  cause  may  be  which  has  generated  it,  should 
produce  any  effect  on  discount,  and  justify  an  increase 
of  the  interest  demanded,  is  a  hopelessly  inexplicable 
and  irrational  proposition.  It  has  not  the  slightest 
pretension  to  science  or  knowledge.  It  is  an  easy 
and  profitable  belief  for  bankers  ;  traders  are  taught 
to  believe  that  it  is  a  natural  law ;  they  are  victimised 
by  their  own  fault,  because  they  do  not  choose  to  think 
and  reason. 

Let  us  look  at  a  fact  which  may  teach  us  much.  The 
tendency  of  imports  to  exceed  exports  in  England  is 
most  marked  and  ever  increasing.  This  cannot  be  the 
result  of  ordinary  trade,  for  that  is  always  an  exchange 
of  equal  goods,  though  at  a  particular  moment  one  of 
the  parties  may  not  have  given  his  share,  and  for  the 
time  disturbs  the  equality  by  passing  into  debt,  by 
taking  and  not  giving.  The  excess  of  imports  mani 
festly  is  the  consequence  of  England  occupying  a 
permanent  position  of  creditor  towards  many  coun 
tries.  Loans  granted  to  foreign  countries  in  every 
form  and  fortunes  owned  abroad  for  which  the  interest 
is  regularly  sent  home  cause  England  to  receive 


WHAT  IS  A  BANK  t  121 

more  than  she  gives  away.  Now  this  excess  of  im 
ports  may  assume  one  of  two  forms  :  it  may  be  sent 
to  England  in  gold  or  in  goods.  If  it  comes  in  goods 
the  national  wealth  is  increased  ;  there  is  more  to  spend 
as  income,  or  to  employ  as  capital  in  industry.  If  it 
comes  in  gold,  it  travels  straight  to  the  cellar  of  the 
Bank.  Is  it  not  obvious  to  the  most  uneducated  under 
standing  that  to  import  this  excess  over  exports  in  goods 
is  to  make  England  richer,  to  import  it  in  gold  is  abso 
lutely  the  same  thing  as  to  give  England  nothing,  for 
gold  in  a  vault,  if  not  serving  a  positively  useful  pur 
pose,  is  no  better  than  a  heap  of  pebbles.  But  it  does 
serve  a  useful  purpose,  it  may  be  said,  it  makes  the  bank 
stronger ;  but  what  is  this  but  to  say  that  banking  is  the 
warehousing  of  gold  and  nothing  more  ?  The  action 
of  human  life  thinks  differently ;  the  imports  are  sent  in 
goods.  England  asks  for  and  gets  wealth,  not  machinery 
for  moving  it,  whether  in  coin  or  in  banks,  whatever 
those  who  preach  the  doctrine  that  to  import  gold 
would  cheapen  discount,  may  desire.  And  do  they 
never  perceive  that  the  way  to  cheapen  discount  is  to 
increase  goods  ?  for  as  no  one  borrows  of  a  bank  but  to 
buy  goods,  and  no  one  deposits  at  a  bank  but  in  conse 
quence  of  his  having  more  goods  than  he  can  use  and 
having  sold  them,  a  larger  stock  of  goods  is  an  increased 
supply  of  the  things  demanded  through  banking,  and 
necessarily  and  inevitably  leads  to  easier  terms  for 
lending  them. 


122        THE  TRUE  CAUSE  OF  RISE  IN  INTEREST. 

The  reverse  happens  when  there  is  a  diminution  of 
goods,  of  the  national  stock  of  wealth.  Thus  a  bad 
harvest  in  England  compels  heavy  purchases  of  corn  in 
America,  and  at  first  is  invariably  attended  by  a  large 
export  of  gold  from  the  Bank.  The  rate  of  discount 
rises.  See  the  consequences  of  gold  diminishing,  cries 
the  City,  but  the  cry  is  the  utterance  of  ignorance. 
The  bad  weather  has  destroyed  a  large  quantity  of 
English  capital.  The  food,  clothes,  materials,  expended 
on  the  farming  of  the  year  have  not  been  reproduced 
in  com.  That  corn  must  be  purchased  a  second  time 
from  the  Americans,  be  paid  for  twice  over  with 
British  wealth.  The  cost  of  producing  the  corn 
which  never  ripened  has  been  a  vast  destruction  of 
capital ;  it  was  not  replaced  at  the  harvest,  and  conse 
quently  those  who  borrow  capital  find  less  in  the  loan 
market,  and  have  to  pay  more  to  procure  it.  The 
departure  of  the  gold,  instead  of  being  the  cause-,  is 
actually  a  very  important  diminution  of  the  evil.  If 
the  gold  were  not  sent  away,  the  full  value  of  the  corn 
brought  would  have  to  be  sent  away  in  goods,  in  capital, 
and  the  rate  of  interest  would  be  still  higher.  The 
City  may  mourn  over  the  loss  of  the  gold  and  ascribe 
the  pressure  to  the  disappearance  of  their  beloved 
treasure ;  they  little  know  that  its  retention  would 
have  added  one  or  two  per  cent,  to  the  bank-rate  in  the 
very  teeth  of  a  larger  reserve. 

The  law  is  universal.     Gold  cannot  be  placed  in  the 


WHAT  IS  A  BANK  f  123 

reserve  of  the  Bank  of  England  or  of  any  other  bank, 
except  at  the  cost  of  diminishing  the  other  wealth  of 
the  country.  A  million  of  additional  gold  at  the  Bank 
means  always,  and  under  all  circumstances,  a  million 
less  of  other  property,  of  goods,  in  the  country ;  and 
consequently  an  increase  of  the  Bank's  reserve  is 
always  a  distinct  loss  of  wealth  and  of  capital,  unless  it 
can  be  shown  that  that  gold  serves  a  useful  purpose 
which  more  than  compensates  for  the  diminution  of 
wealth.  The  safety  of  the  Bank  is  such  a  useful  pur 
pose,  and  none  other  can  be  named,  but  to  say  that  the 
Bank  is  in  peril  because  its  reserve  is  accounted  low,  or 
a  million  or  two  has  gone  away,  much  more  a  few 
hundreds  of  thousands,  is  senseless  talk,  unless  the 
probability  or  even  possibility  of  the  Bank  coming  to  a 
stoppage  be  shown. 

That  the  power  of  the  Bank  to  lend  need  not  be 
crippled  by  regard  for  the  amount  of  its  reserve  was 
strikingly  illustrated  by  the  events  of  the  terrible  year, 
1866.  On  May  9  the  Bank  had  a  reserve  of  13^ 
millions  in  round  numbers,  and  had  lent  20^  millions. 
After  the  black  Friday  of  May  16,  it  had  lent  31 
millions,  whilst  its  reserve  stood  at  12%  millions — more 
than  I  million  less  than  it  had  when  it  lent  only  20^ 
millions.  On  May  30  the  loans  reached  the  unex 
ampled  sum  of  33^  millions,  yet  the  reserve  had 
sunk  to  n^  millions.  The  reserve  goes  down. 
In  the  teeth  of  this  fact  the  lendings  of  the  Bank 


1  24  RESERVES  AND  LENDINGS. 

rise  to  a  gigantic  height.  What  becomes  of  the 
doctrine  that  it  must  lend  less  as  the  reserve  goes 
down  ?  Did  a  single  man  call  the  Bank  unsafe  when 
this  disregard  for  the  reserve,  and  this  hardihood  in 
lending,  went  on  ?  Not  one.  What  then  becomes  of  this 
miserable  doctrine,  the  great  practical  rule,  that  when 
the  Bank  loses  a  few  hundreds  of  thousands,  it  must 
contract  its  operations  and  make  loans  difficult  and 
dear?  The  real  indisputable  fact  revealed  by  the 
Bank's  weekly  reports  is  that  all  sorts  of  reserves 
accompany  all  sorts  of  lendings.  Large  reserves  are 
found  with  small  discounting,  and  great  advances  with 
small  reserves.  The  man  who  merely  looks  at  the  size 
of  the  Bank's  reserve  will  be  utterly  unable  to  guess 
how  numerous  are  its  securities,  how  much  it  has  lent. 

But,  reply  the  City  theorists,  gold  rules  the  rate  of 
interest.  When  the  reserve  is  full  of  gold,  borrowing  is 
cheap ;  when  gold  flows  away  the  rate  rises  and  traders 
suffer.  But  is  this  so  ?  Let  us  put  the  question  to  the 
same  great  year  of  agony,  1 866,  and  compare  its  answer 
with  those  of  1856.  In  the  first  week  of  1856,  with 
ioji  millions  of  gold  we  have  a  rate  of  discount  of  6 
and  7  per  cent.  In  1866  the  gold  has  mounted  up  to 
13  millions— 2  j£  millions  more.  At  what  rate  stands 
discount.  At  a  lower  figure,  in  obedience  to  the 
alleged  law?  Just  the  reverse.  It  too  has  gone  up 
to  8  per  cent.  On  March  21,  1856,  the  bullion  and  the 
rate  of  discount  remain  unchanged.  In  the  same  week 


WHAT  IS  A  BANK  ?  125 

of  1866,  the  bullion  has  reached  14 J^  millions — 4 
additional  millions.  Have  they  told  on  the  bank  rate  ? 
By  no  means.  They  have  done  nothing  at  all.  It 
continues  at  the  same  figures.  On  May  9,  1856,  the 
bullion  stood  at  9^  millions  with  a  rate  of  6  and  7  per 
cent. ;  in  1866  there  were  3  more  millions  of  gold,  and 
then,  as  if  to  mock  the  City  and  its  doctrine,  the  rate 
runs  up  to  9*  per  cent.  Then  comes  the  return  of  June 
12.  There  are  18  millions  of  gold  with  a  rate  of  5  per 
cent,  in  1856;  in  1866  14^  millions  stand  side  by 
side  with  10  per  cent,  double  the  charge  imposed  on 
the  discount  market,  in  the  teeth  of  2^  millions  more 
of  gold.  The  statements  of  the  whole  year  tell  the 
same  tale.  They  demonstrate  that  the  doctrine  which 
makes  the  rate  of  discount  depend  on  the  quantity  of 
reserve  is  an  absolute  untruth — the  fallacy  of  City 
articles  and  the  practical  man.  These  facts  cause  no 
surprise  to  one  who  has  learnt  the  nature  of  currency. 
He  knows  that  gold  and  notes  are  required  for  ready- 
money  payments  only,  and  that  if  there  is  an  excess  of 
them  it  cannot  be  employed,  it  cannot  be  lent,  and  if  it 
is  not  a  fund  available  for  lending,  it  cannot  exercise 
any  influence  on  the  charge  for  lending.  When  the 
supply  for  ready-money  payments  is  provided,  all  the 
rest  of  the  business  of  the  country  is  carried  out  by 
paper  documents,  by  cheques  and  bills.  But  the  City 
may  still  contend  that  the  Bank  can,  and,  when  it 
chooses,  does  fix  the  rate  with  reference  to  "the  move- 


126  WHAT  EXPANDS  TRADE. 

ments  of  the  gold.  That  is  true,  I  believe,  it  does  so 
occasionally;  but  the  Bank  returns  here  cited  prove 
two  things,  that  they  are  not  obliged  to  do  so,  for  the 
Bank  gets  on  perfectly  well  when  it  violates  this  fancy 
rule,  and  further  that  as  a  fact  it  does  act  upon  the  rule 
very  rarely. 

It  is  no  unusual  sight  to  find  writers  of  oracular 
authority,  whether  in  or  out  of  the  Press,  in  times  such 
as  the  present,  when  trade  is  exceptionally  slack  and 
profits  are  weak,  and  capital  shows  little  eagerness  to 
embark  on  new  undertakings,  and  the  rate  of  banking 
interest  is  unwontedly  low,  endeavouring  to  rally  the 
spirits  of  desponding  traders  by  announcing  that  gold 
is  likely  to  flow  in  from  foreign  parts,  and  will  be  sure 
to  animate  industry,  and  to  improve  business,  and  to 
swell  both  wages  and  profits,  and,  most  of  all,  restore 
the  gains  of  the  banking  world  and  the  money-market. 
What  can  be  the  idea  which  such  persons  have  of 
currency  ?  Have  they  ever  said  to  themselves,  in  plain 
words,  what  currency  can  and  does  do  ?  The  stock  of 
gold  all  the  world  over  remains  the  same,  whether  the 
nation  is  uplifted  with  swelling  prosperity,  or  whether 
trade  is  groaning  under  biting  losses  and  the  money- 
market  convulsed  with  agony.  The  only  possible 
thing  that  can  have  happened  to  the  gold  is  to  be 
found  in  a  different  place ;  and  will  any  man  venture  to 
assert  that  gold  put  in  one  place  in  the  stead  of  another 
— gold  which  can  only  have  been  procured  by  buying 


WHAT  IS  A  BANK  ?  127 

it  with  an  equal  quantity  of  other  wealth — makes  pre 
cisely  the  difference  between  the  production  and  the 
destruction  of  wealth,  between  a  trade  that  accumulates 
riches  and  one  that  plunges  into  ruin  ?  If  there  be  an 
iota  of  truth  in  such  a  view,  let  us  be  told  how  the  gold 
acts,  how  it  accomplishes  these  wonders.  The  mode  of 
operation  is  essential  to  the  understanding  of  such  effects. 
Gold,  we  know,  can  place  goods  in  one  person's  hands 
in  the  stead  of  another's ;  but  what  increase  of  wealth, 
what  gain  to  profits  and  wages,  is  there  in  that,  when 
there  is  already  gold  enough  for  carrying  out  ready- 
money  payments  ?  There  are  no  believers  in  magical 
and  mysterious  powers  comparable  to  the  oracles  of  the 
money-market. 

(  But  what  then  is  the  power  which  governs  the  rate  of 
interest  ?  The  answer  to  this  question  must  be  sought 
from  the  character  of  a  banker,  as  a  broker  between  two 
principals.  ^The  power  to  determine  the  rate  of  interest  at 
his  own  caprice  does  not  lie  with  him,  but  he  is  the  inter 
preter  for  the  moment  of  the  forces  at  work,  and  he 
makes  a  trial  of  the  rate  which  those  forces  prescribe. 
If  he  errs,  events  will  compel  him  to  alter  the  rate ;  in 
other  words,  the  banker,  as  the  fixer  of  price  in  the  loan 
market,  is  subject,  as  all  dealers  in  all  markets,  to  the 
universal  law  of  supply  and  demand.  He  deals  in  pur 
chasing  power  lodged  in  his  hands  by  one  principal  and 
borrowed  by  another.  When  farmers,  manufacturers, 
and  merchants  are  thriving  and  making  profits,  they  tend 


128     THE  THINGS  THAT  RULE  INTEREST. 

to  buy  less  than  they  receive;  hence  the  banker's  means 
of  lending  expand.  Bad  harvests,  losing  trade,  slacken 
ing  buyers,  diminish  profits  and  weaken  the  banker;  there 
is  less  to  lend.  On  the  other  side,  opportunities  may 
offer  for  employing  capital  with  increased  advantage,  in 
a  colony,  in  a  new  industry  at  home,  and  the  like ;  the 
demand  for  loans  increases.  Or  particular  trades  may 
languish,  and  require  less  borrowed  capital  than  for 
merly  ;  loans  are  in  weaker  demand,  and  the  rate  of 
interest  tends  to  falling.  Or  again,  borrowers  may  have 
lost  what  was  lent  them,  and  their  bills  are  dishonoured, 
and  losses  deal  blows  all  round  ;  then  swiftly  rises  the 
rate.  In  one  word,  ( the  events  which  are  happening, 
to  his  two  principals  rule  the  banker's  charge  for  lend 
ing-  ) 

But  these  principals  of  the  banking  community  com 
prise  the  whole  nation  ;  changes,  therefore,  which  befall 
the  nation  act  directly  on  banking.  The  habits  of  a 
population  may  vary  much  from  year  to  year.  The  per 
severing  thrift  of  Frenchmen  steadies  the  loan  market 
of  France  ;  it  ever  adds  to  its  resources  and  marvellously 
retrieves  disasters.  It  is  much  otherwise  with  Anglo- 
Saxons,  be  they  Englishmen,  Colonists,  or  Americans. 
An  increase  of  property  leads  at  once  to  an  increase  of 
consumption  ;  and  that  consumption  often  goes  on  undi- 
minished  after  adverse  times  have  set  in,  thus  entailing  an 
inevitable  destruction  of  capital.  A  fever  of  speculation 
will  break  out,  as  in  the  body  physical.  Because  some 


WHAT  IS  A  BANK?  I2Q 

railways  have  paid  well,  and  carry  large  premiums,  far 
more  railways  are  commenced  than  there  are  means  of 
completing,  whilst  the  premiums  won  for  their  shares  are 
expended  in  wasteful  luxury,  to  the  serious  lessening  of 
the  country's  wealth.  There  are  multitudes  of  Anglo- 
Saxons  who  consume  as  much  in  bad  years — or  other 
public  disorders,  such  as  war — as  in  good  years ;  the 
Frenchman  betakes  himself  to  retrenchment  at  once,  and 
then  all  Europe  is  surprised,  and  sometimes  uneasy,  at  the 
unexpected  economical  strength  he  displays.  England 
and  America  have  often  made  the  discovery,  to  their 
astonishment,  that  they  have  been  spending  not  income 
but  capital ;  that  they  not  only  have  not  saved  when 
there  was  nothing  to  save,  but  have  continued  their  rate 
of  consumption,  and  on  pay-day,  be  it  for  the  nation  or 
the  individual,  have  to  learn  amidst  suffering  that  their 
property  is  less  than  it  was.  Debts  have  been  contracted, 
means  to  meet  them  have  vanished,  accounts  at  banks 
are  reduced,  bills  are  not  paid,  great  firms  break,  and 
hurricanes  sweep  over  the  bewildered  money  market. 
(It  is  not  to  be  denied  that  the  banker  at  the  moment 
is  the  judge  of  the  state  of  affairs,  and  may,  with  or  with 
out  reflection,  determine  to  lend  less  or  to  lend  more.  \ 
But  his  action  is  only  identical  with  a  seller  of  cattle  at 
a  fair,  who,  for  an  hour  or  two  may  fix  the  price  of  his 
animals,  but,  if  he  must  sell  them,  he  must  submit  to 
the  market  price  at  last. 

It  must  be  observed  that  in  seasons  of  regular  trade 


I3O    HIGH  INTEREST  NOT  NECESSARILY  OPPRESSIVE. 

and  expenditure  the  actual  figure  at  which  the  rate  of 
discount  stands  does  not  necessarily  denote  a  prosperous 
or  a  damaged  economical  condition.  A  low  rate  does 
not  always  indicate  a  thriving  trade,  nor  a  high  rate 
distressed  commerce.  Thus  a  high  rate  of  interest 
in  the  United  States  and  the  Colonies  implies  no  dis 
advantage,  nor  any  exceptional  risk  ;  it  is  a  natural 
result  of  the  great  returns  which  industry  gives  in  new 
countries;  men  can  afford  to  pay  a  higher  charge  for 
loans,  because  capital  is  so  exceedingly  productive. 
Thus  some  years  ago  7  per  cent,  was  obtained  for  a  long 
period  by  the  Bank  of  England  with  ease,  and  paid  with 
equal  ease  by  the  applicants  for  discount,  though  at  the 
present  time  such  a  rate  would  be  felt  oppressive.  The 
superior  productiveness  of  trade  at  one  time  compared 
with  another  explains  the  difference  of  feeling.  ^ 

But  though  the  law  of  the  banking  market  places  the 
normal  determination  of  supply  and  demand  in  the 
banking  market  in  the  banker's  two  principals,  and  in 
the  wealth  which  they,  and  not  he,  handle,  it  is  never 
theless  a  painful  but  notorious  fact  that  the  banking 
market  is  exposed,  beyond  all  others,  to  desolating 
storms.  \The  discount  market  is  the  most  sensitive,  the 
most  sudden,  and  often  the  most  difficult  to  forecast  of  all 
markets^)  Its  peculiar  dangerousness  in  England  springs 
mainly  from  the  vast  multitude  of  transactions,  pressing 
from  every  region  on  earth,  and  converging  upon  a  single 
centre  of  commercial  credit,  London.  Often  it  is  very 


WHAT  IS  A  BANK  ?  13! 

hard  to  discern  in  time  the  forces  at  work,  or  to  predict 
their  consequences  ;  there  are  moral  forces,  too,  to  be  rec 
koned  with,  which  at  times  are  as  fitful  as  the  winds.  ^Con 
fidence  enters  as  an  ingredient  into  banking — confidence 
in  the  depositor  that  the  bankenwill  hold  his  funds  in  safe 
keeping,  and  confidence  with  respect  to  the  borrower  that 
he  will  preserve  and  not  destroy  what  is  lent  to  him.  Such 
confidence  is  easily  shaken  when  once  depositors  begin 
to  doubt  whether  the  banker  may  not  have  entrusted 
his  funds  to  people  who  have  lost  them.^  The  failure  of 
a  few  great  houses,  the  explosion  of  alarge  finance  com 
pany  or  two,  the  stoppage  of  a  bank  is  sufficient  to  throw 
the  banking  world  into  an  agony  of  alarm.  Such  cala 
mities  lie  in  the  very  nature  of  banking,  for  banking  is 
credit,  lending ;  and  the  depositor,  who  knows  that  the 
banker  will  lend  his  deposit,  does  not  know  whom  he 
lends  it  to.  There  is  plenty  of  room  here  for  wild  impulses 
of  ignorant  panic.  At  such  seasons  depositors  rush  in 
upon  the  bankers  for  repayment,  the  banks  urgently 
reclaim  advances,  the  assistance  given  to  trade,  which  is 
the  best  service  that,  banking  renders,  and,  still  more, 
which  is  relied  upon  by  merchants  and  traders  as  a  re 
gular  resource  of  their  business,  is  diminished  or  refused 
altogether.  Merchants,  though  substantially  solvent,  are 
from  this  sudden  desertion  of  the  bankers,  for  the 
moment  unable  to  meet  their  engagements,  and  frantic 
demand  for  help  runs  up  the  rate  of  interest  to  a  disas 
trous  height.  The  cause  of  such  tempests  undoubtedly 


132  WHAT  IS  A  CRISIS  ? 

resides  in  the  state  of  the  country's  wealth ;  but  their 
violence  in  the  banking  market  is  generated  by  moral 
impulses,  so  well  summed  up  in  the  fearful  word  panic. 
Such  crises,  as  they  are  called,  are  inherent  in  banking 
operations  which  cover  the  whole  globe;  but  the  ruin 
they  create  is  so  severe,  and  their  effects,  not  only  on 
merchants  and  traders,  but  on  the  general  population  of 
a  country  are  so  painful,  that  it  becomes  a  matter  of  high 
importance  to  ascertain,  as  far  as  is  practicable,  their  true 
nature,  and  to  seek  to  gather  lessons  which  may  help  to 
mitigate  or  even  avert  such  calamities. 

I.  In  the  first  place,  a  crisis  in  the  money  market  is 
something  radically  different  in  kind  from  a  disturbance, 
however  severe,  in  a  branch  of  commerce.  From  an 
occurrence  of  this  latter  kind  the  element  of  vague  and 
reckless  terror  is  absent.  This  element  appears  in  bank 
ing  because  the  depositor  has  no  other  security  for  the 
safety  of  his  debt  but  the  solvency  of  the  barker ;  and 
what  wild  undertakings  may  he  not  have  supported  with 
means  which  belonged  to  others  ?  The  banker,  too, 
becomes  very  uneasy :  what  grand  houses  or  companies, 
whose  bills  he  holds  in  hundreds,  or  whose  names  figure 
in  his  books  against  heavy  advances,  may  be  unsound 
at  the  core,  and  suddenly  declare  themselves  insolvent  ? 
Many  of  these  houses  may  be  really  solvent ;  but  what 
man  can  face  his  liabilities  if  they  are  all  flung  on  him 
together  in  the  middle  of  apparent  sunshine  ?  Then  there 
is  always  the  danger  peculiar  to  banking.  If  ordinary 


WHAT  IS  A  BANK?  133 

persons  are  asked  to  pay  their  debts,  and  cannot,  the  pro 
cess  of  bringing  them  into  the  Bankruptcy  Court  is  long ; 
they  are  not  ruined  at  once ;  but  a  bank  that  refuses  to 
pay  its  cheques  is  instantly  arrested  in  its  business ;  it 
shuts  its  doors  ;  and  probably  will  never  survive  the 
blow.  Its  affairs  go  into  liquidation.  But  the  mischief 
takes  a  much  wider  range.  If  houses  have  failed  in  a 
particular  trade,  the  blow  is  limited  to  themselves  and  the 
number  of  persons  directly  associated  with  them  in  that 
trade.  The  calamity  with  a  banking  crisis  is  national. 
Trade  in  England,  to  a  vast  extent,  is  worked  by  loans 
obtained  from  banks  on  discount.  A  sudden  rise  in  the 
charge  for  discount,  still  more  the  difficulty  of  obtaining 
it  at  all,  paralyses  trading  operations  all  over  the  nation 
which  were  framed  upon  reliance  on  discount  and  a 
moderate  rate  for  its  aid.  The  rise  to  10  per  cent,  in  a 
week,  or  even  a  day,  converts  most  legitimate  mercan 
tile  enterprises  into  loss,  or  even  ruin.  In  ordinary 
times  business  moves  along  with  so  much  smoothness, 
that  the  thought  of  danger,  or  even  pressure,  occurs  to 
no  one ;  yet  in  these  pleasant  waters  the  whirlwind 
arises  with  the  suddenness  and  destructiveness  of  a 
typhoon.  Merchants  buy,  order  cargoes,  sign  bills, 
incur  liabilities  infinitely  transcending  their  own  ability 
to  pay,  in  the  unclouded  assurance  that  the  bills  which 
they  receive  for  goods  sold  will  be  discounted,  that  is, 
will  be  converted  into  purchasing  or  paying  power  by 
bankers.  All  traders  are  mere  intermediate  machinery 


1.34   TRADERS  GREATLY  DEPENDENT  ON  DISCOUNT. 

between  makers  and  consumers,  between  growers  of 
cotton  in  America  and  the  wearers  of  calico  shirts  in 
England.  Indeed,  trade  might  be  defined  as  the  plant 
ing  of  goods  in  the  places  where  they  are  wanted.  In 
performing  this  function,  modern  trade  avails  itself 
of  the  resources  of  banks — that  is,  to  go  back  to  our 
analysis,  the  cotton  merchant  buys  by  the  help  of  the 
corn  which  the  farmer  has  sold.  By  this  process  he 
carries  on  a  business,  with  advantage  to  society,  far  ex 
ceeding  his  own  personal  means.  What  if  this  resource 
fails  him?  He  relied  upon  it;  but  he  cannot  make 
bankers  prudent.  He  is  no  wild  speculator  himself,  he 
pursues  the  well-worn  path  of  ordinary  business ;  yet  he 
may  be  brought  to  bankruptcy  by  the  imprudent  opera 
tions  of  bankers.  By  the  system  of  bills,  the  whole 
body  of  traders  are  partners  with  the  banking  com 
munity,  and  yet  they  have  neither  the  knowledge  nor 
the  power  of  checking  which  real  partners  possess. 

2.  In  the  next  place,  it  is  plain  that  on  the  side  of 
their  receipts  bankers  are  passive;  in  respect  of  their 
advances,  the  causes  which  act  on  banks  are  mainly  of 
their  own  making.  Deposits  are  determined  by  the 
state  of  the  nation's  wealth :  a  banker  cannot  make 
them  larger  or  smaller ;  but  it  is  his  clear  duty  (and  how 
many  bankers  are  aware  of  it?)  to  watch  closely  the 
forces  which  are  swelling  or  diminishing  those  surpluses 
of  commodities  which  enable  each  depositor  to  sell 
more  than  he  buys.  The  banker  who  desires  to  be 


WHAT  IS  A  BANK  ?  J35 

prepared  for  a  crisis  ought  to  know  that  the  loss  of 
wealth  which  weakens  deposits  may  arise  from  two 
causes :  positively,  from  an  actual  destruction  of  wealth ; 
or  negatively,  from  a  failure  in  its  ordinary  rate  of  ac 
cumulation.  One  form  of  this  destruction  of  wealth  is 
full  of  danger  for  him,  and  it  is  incomparably  the  most 
prolific  parent  of  crises ;  yet  it  is  seldom  understood  by 
bankers.  Most  persons  are  satisfied  if  an  undertaking 
is  sound  in  character;  if  it  is  no  bubble,  but  a  solid 
investment.  They  press  it  forward,  and  preach  to 
bankers  that  they  are  safe,  or  even  patriotic,  in  pro 
moting  such  enterprises.  Such  are  works  of  drainage, 
railways,  docks,  canals,  and  the  like.  No  doubt  they 
are  all  highly  productive  of  wealth.  The  growth  o£  a 
nation  largely  turns  upon  the  prosecution  of  such  works. 
But  no  one  stops  to  reflect  that  such  operations  destroy 
wealth  and  impoverish  until  they  are  capable,  not  only 
of  yielding  profits,  but  also  of  replacing  what  the  making 
of  them  has  consumed.  Nothing  enriches  a  country  like 
a  well-planned  railway;  yet  the  construction  of  railways 
is  nothing  but  a  gigantic  destruction  of  wealth.  A 
railway  is  said  to  have  cost  ten  millions  of  pounds,  and 
there  the  mind  is  apt  to  stop.  But  money  is  no  part  of 
its  cost ;  it  moved  money  about,  but  there  was  as  much 
money  at  the  end  as  there  was  at  the  beginning  of  its 
construction.  Its  cost  is  something  radically  different 
from  money.  The  making  of  a  railway  employed  a 
vast  amount  of  labour.  That  is,  it  fed  and  clothed  a 


136  WHAT  PRODUCES  A  CRISIS. 

vast  body  of  men  for  a  long  time ;  it  used  up  huge 
quantities  of  iron  and  other  materials,  the  making  of 
which  consumed  food  and  clothing ;  and  the  result 
is  only  a  line  of  rails,  tunnels  and  embankments — 
a  mere  change  in  the  surface  of  the  land.  No  one 
doubts  that  if  the  labourers,  instead  of  constructing  a 
railway,  had  been  set  to  dig  holes  in  the  ground  and  to 
fill  them  up  again,  a  flood  of  poverty  would  have  spread 
over  the  country.  In  what  respect,  for  the  time,  does  a 
railway  differ  from  such  holes  ?  If  all  this  labour  had 
been  employed  in  manufacturing  iron  and  calico,  and 
exchanging  it  in  America  for  corn  and  bacon,  the 
wealth  of  the  nation  would  have  suffered  no  diminu 
tion  ;  whilst  everything  consumed  directly  and  indirectly 
in  constructing  a  railway,  until  replaced  by  goods,  by 
actual  commodities,  by  other  wealth,  is  a  dead  loss,  a 
real  infliction,  so  far,  of  poverty.  New  works  of  solid 
and  enriching  character,  but  of  long  replacement  of 
capital  consumed,  are  the  very  raw  material  of  a  crisis. 

The  distinctive  characteristic  of  a  true  crisis  is  that 
it  is  the  consequences  of  a  previous  destruction  of 
wealth.  This  great  feature,  in  spite  of  its  immense  im 
portance  for  preventive  action,  scarcely  any  one  notices; 
yet  it  is  the  fact  which  gives  its  real  significance  to  a 
crisis.  The  expression  panic  denotes  well  the  agitation 
which  sets  in  upon  the  banking  world,  when  losses  are 
discovered  and  wild  suspicion  awakened,  and  general 
terror  is  excited,  as  to  who  is  safe  and  who  not :  but  the 


WHAT  IS  A  BANK?  137 

crisis  which  is  the  cause  of  the  panic  has  a  far  earlier 
origin.      There    may   be   great   losses   in   the   money 
market,  many  premiums   may   have   turned    into   dis 
counts,  many  persons  grievously  hurt,  yet  there  is  not 
necessarily  a  panic.     What  one  man  loses  another  man 
has  gained  :  banking  resources  need  not  generally  be 
reduced  by  the  commotion,  even  though  a  bank  or  two 
may  have  its  credit,  or  even  its  existence  compromised. 
The  discounting  of  commercial  bills  may,  on  the  whole, 
find  lending  power  undiminished.     Again,  great  losses 
may  occur  in  a  particular  trade  and  yet  no  crisis  spring 
up.      The   cotton   famine   brought   heavy  disaster   on 
Lancashire,    many   fortunes   passed   away,   yet   at   no 
period  of  this  paralysis  of  a  vast  trade  did  a  crisis  set 
in.     The  calamity  came  on  slowly :  bankers,  merchants, 
manufacturers,  every  one  foresaw  it,  and  shaped  their 
conduct  accordingly.    There  was  no  surprise,  no  sudden 
and  rapid  plunge  from  prosperity  into  adversity,  no  un 
expected  revelation  that  men  who  stood  in  high  repute 
were  undermined  and  falling,  no  agony  agitating  bank 
ers  and  creditors  as  to  who  was  able  to  pay  and  who 
not,  no  hurricane  bursting  on  discount  and  loans.     It  ^ 
is   often   said   in   the   press   that    a   country   has   not 
recovered  a  monetary  crisis  for  years,  but  this  is  inac 
curate  language.    A  country  cannot  be  long  injured  by 
the  mere  fact  that  some  banks  and  mercantile  houses 
have  been  brought  to  a  stoppage.     Gold,  notes,  banks, 
commercial  firms,  are  mere  machinery :  they  are  not  the 


138       EFFECTS  OF  WEALTH  DESTROYED  LAST  LONG. 

wealth  of  a  nation.  They  may  fall  into  disorder,  but 
if  that  is  all,  the  national  wealth  remains  intact  and 
trade  will  soon  right  itself.  But  it  is  true  nevertheless 
that  the  effects  of  a  crisis  last  for  a  long  time,  but 
that  happens — and  this  is  the  great  truth  to  remember 
—because  a  crisis  is  only  the  culminating  point  of  a 
long-continued  destruction  of  capital  which  has  pre 
ceded.  Thus  in  1825  some  thirty  millions  had  been 
lent  to  the  States  of  South  America,  which  had  left 
England — as  public  loans  always  do — not  in  money 
but  in  goods.  The  wealth  of  England  was  reduced  by 
goods  worth  that  sum  of  money.  Bankers  too  had 
largely  speculated  in  mines  and  other  venturesome  under 
takings,  and  had  encouraged  others  to  speculate.  But 
speculation  is  not  mere  betting,  for  then  the  country 
would  be  none  the  poorer — the  speculation  was  of  a 
different  kind.  It  set  in  movement  vast  applications  of 
labour.  Wages  were  given,  which  means  that  food  and 
clothing  were  consumed  :  materials  were  bought  with 
labour — that  is  again,  with  the  destruction  of  the  things 
consumed  by  the  makers  :  the  returns  made  to  the 
capital  destroyed  were  poor,  wealth  was  diminished, 
banks  failed,  and  losses  fell  upon  depositors.  So 
again  in  1847,  the  potatoe  disease  had  caused  a  gigantic 
destruction  of  wealth.  The  cotton  crop  had  failed  in 
America,  rendering  cotton  dear,  thus  diminishing  Eng 
lish  trade  with  foreign  countries,  and  impoverishing 
English  consumers.  Above  all,  the  construction  of 


WHAT  IS  A  BANK  ?  139 

railways  had  been  carried  on  to  an  extent  far  exceed 
ing  the  savings  of  the  country.  They  could  not  be  com 
pleted  by  those  who  had  committed  themselves  to  the 
shares.  They  could  not  meet  the  calls.  The  resources 
of  the  banks  were  crippled.  The  shareholders  had 
emptied  out  their  accounts,  and  borrowed,  when  they 
could,  from  the  banks  instead  of  bringing  in  deposits. 
Shares  were  unsaleable,  except  at  ruinous  loss.  But  the 
fact  to  grasp  in  all  this  disorder  is  that  the  shareholders 
had  expended  their  property  in  setting  labourers  to 
work,  who  consumed  the  wealth  and  made  diverse  con 
structions  on  the  ground,  which  did  not  act  as  wealth, 
and  were  not  wealth  at  all  till  they  proceeded  to  work 
in  making  wealth.  In  1857  a  similar  excess  of  railway 
construction  had  been  carried  on  in  America,  which 
compromised  much  English  wealth,  and  disturbed  one 
of  the  most  important  of  English  trades.  France,  too, 
experienced  a  similar  derangement,  and  then  a  sharp 
though  short  crisis  was  rapidly  developed.  In  1866  the 
civil  war  in  America  had  overthrown  the  production  of 
cotton,  a  crop  as  truly  English  as  if  it  had  been  grown 
in  England.  The  Americans  lost  the  power  of  buying 
English  goods.  English  capital — always  in  the  form  of 
English  goods — had  been  sent  to  India,  to  Egypt,  and  to 
other  regions,  to  promote  the  growth  of  cotton  in  order 
^to  make  up  the  deficiency  of  the  American  supply. 
Houses  like  the  Gurneys  had  built  ships  at  Millwall  and 
equipped  great  fleets  in  Galway  with  much  consumption 


I4O  AMERICAN  CRISIS  OF   1873. 

of  wealth  :  they  were  not  wanted,  and  were  nearly  pure 
waste.  Mills  and  factories  had  been  built  far  beyond 
the  means  of  trade  to  give  them  employment;  the  capi 
tal  consumed  by  the  workmen  in  building  was  for  the 
time  a  dead  loss.  Abroad  towns  had  been  enlarged 
and  beautified  with  English  capital :  industries  had 
been  opened  out  in  the  colonies  in  countless  numbers, 
whilst  at  home  numerous  railway  projects  had  been 
commenced :  the  destruction  of  food  and  clothing  by 
the  workmen  was  not  replaced  by  unfinished  lines  : 
not  one  shilling's  worth  of  wealth  had  been  produced  in 
return. 

So  it  was  in  the  great  American  crisis  of  1873.  Rail 
ways  had  been  commenced  in  the  wilds,  far  beyond  the 
spare  capital  of  the  nation  to  complete.  The  very  pro 
cess  of  consuming  the  capital  expended  on  these  works 
spread  a  sunshine  of  seeming  prosperity  all  around. 
Amidst  premiums  and  unlimited  markets  for  stock  and 
shares  all  appeared  to  be  growing  rich  together,  and 
spent — that  is,  consumed  goods — profusely.  If  a  people 
chose  to  eat  and  drink  up  all  their  property  in  one  year, 
gigantic  would  be  the  abundance  of  enjoyments  poured 
out  upon  every  family ;  but  they  would  starve  the  next. 
The  time  arrived  at  last,  when  wealth  failed  and  was  not 
to  be  procured,  railway  shares  and  bonds  became  unsale 
able,  and  the  wasteful  but  radiant  consumption  ceased.% 
The  national  impoverishment  then  became  visible  to 
every  eye. 


WHAT  IS  A  BANK  ?  14! 

In  all  these  transactions  the  banks  were  largely  impli 
cated.  They  did  not  the  less  develop  the  mischief 
because  their  securities  seemed  to  protect  them.  They 
encouraged  new  projects,  they  helped  to  raise  up  the 
premiums,  they  derived  vast  profits  from  the  demand 
for  loans  with  augmented  interest.  Few  bankers  dreamt 
of  the  specific  and  formidable  danger  of  a  multitude  of 
schemes,  however  sound  in  themselves,  begun  with  no 
other  foundation  for  their  completion  than  a  vague 
reliance  on  the  future  resources  of  bankers.  How  many 
bankers  knew  that  they  were  but  mere  machines,  that 
the  causes  of  prosperity  or  adversity  lay  in  the  state  of 
the  nation's  wealth,  in  the  production  or  destruction  of 
commodities  ?  All  goes  on  thrivingly  till  at  last  the 
means  of  the  nation  are  crippled  by  the  disproportion 
between  wealth  destroyed  and  wealth  reproduced. 
Then  on  speeds  the  storm.  The  bankers,  previously  so 
open-handed,  refuse  further  advances  and  recall  the  old 
ones.  Companies  are  brought  to  a  standstill  with  works 
unfinished.  Their  bonds,  thought  to  be  such  excellent 
securities,  are  unsaleable  and  unrealisable.  Merchants 
and  traders,  who  have  been  all  along  outside  of  these 
proceedings,  cannot  obtain  discount  except  upon  ruinous 
terms.  They  cannot  meet  their  engagements  because 
the  banks  they  relied  on  cannot  furnish  the  wonted  ac 
commodation.  Property  is  sacrificed  by  forced  sales, 
and  fear  and  ruin  walk  over  the  whole  commercial 
world. 


142         A  CRISIS  THE  SETTLEMENT  OF  LOSSES. 

The  day  of  crisis  is  the  day  of  the  settlement  of  losses, 
the  day  of  discovering  who  is  to  lose.  This  it  is  which 
creates  the  agony — the  panic.  The  fact  stands  suddenly 
revealed  that  huge  losses  have  been  made— that  wealth 
is  gone ;  and  then  bursts  upon  a  surprised  world  the 
terrible  anxiety,  whose  debts  are  sound  and  will  be  paid. 
The  stock  of  commodities  of  every  kind  is  found  to  be 
fearfully  reduced.  Those  who  had  the  wealth  placed 
in  their  own  hands  have  used  it  up  and  destroyed  it, 
whether  by  actual  waste,  or  by  a  consumption  unpro 
ductive  for  the  time  and  generating  precisely  the  same 
effects  as  waste.  On  whom  does  the  waste  fall  ?  is  the 
question  of  questions  in  a  crisis.  Not  on  the  workmen 
who  laboured  on  the  unfinished  railways,  for  they 
received  wages,  and  with  them  consumed  the  wealth. 
Nor  generally  on  the  contractors  who  set  them  to  work; 
they  received  means  to  give  wages  as  the  work  went 
along.  Yet  many  of  these  are  caught  by  the  storm;  it 
burst  suddenly  when  they  were  receiving  help  from 
banks  and  financial  institutions  in  reliance  on  early  pay 
ments  from  the  real  owners  of  the  work  done.  When 
contractors  fail  many  are  the  creditors  who  suddenly 
find  themselves  stripped  of  their  property.  Financial 
houses  spread  the  desolation  wider.  Countless  bills  are 
found  to  be  worthless,  and  suspensions  spring  up  in 
crowds.  Customers  who  had  contrived  to  borrow  from 
banks  are  asked  to  repay  and  cannot.  Their  shares 
cannot  be  sold.  Banks  are  exposed  to  great  peril,  for 


WHAT  IS  A  BANK  ?  1 43 

their  second  principals,  their  borrowers,  are  failing  fast. 
Still  the  terrible  anxiety  is,  Who  is  to  lose  ?  for  in  such 
a  vast  machinery  of  lending  and  debts,  it  is  hard  to  tell 
who  are  the  real  owners  of  the  property  lost,  and  must 
pay  for  it.  If  a  bank  suspends,  hundreds,  perhaps  thou 
sands  of  persons  are  brought  into  danger,  nay,  possibly 
into  ruin. 

In  the  day  of  alarm  the  supreme  question  is  the  state 
of  the  second  principals  of  bankers,  those  to  whom  they 
have  transferred  the  funds  of  their  depositors.  Have 
the  banks  lent  to  men  who  cannot  repay  their  loans  ? 
and  this  in  reality  means,  Have  the  banks  done  good  or 
bad  banking  ?  The  position  of  the  Bank  of  England  in 
a  crisis  affords  grand  instruction  on  this  vital  matter. 
No  one  ever  distrusts  the  Bank  of  England  ;  no  deposi 
tor  suspects  that  it  has  lent  his  deposit,  his  purchasing 
power,  improperly.  Not  a  man  is  eager  to  obtain  back 
his  deposit  on  the  ground  that  the  Bank  may  be  in 
difficulties  from  its  borrowers  being  unsound.  This 
untarnished  credit  is  the  child  'of  good  banking.  The 
Bank  exercises  its  specific  function  well.  It  chooses  its 
second  principals  skilfully.  No  one  of  its  first  principals 
trembles  for  the  safety  of  the  Bank's  debt  to  him.  And 
if  bankers  chose  they  might  all  bank  in  the  same  man 
ner,  and  then  the  special  disaster  of  a  crisis — vague 
suspicion  and  terror — would  never  arise.  No  banker 
need  lend  without  solid  security.  The  difficulty  might 
present  itself,  possibly,  that  the  bank  might  not  be 


144       THE  BANK  CAN  LEND  MUCH  IN  A  CRISIS. 

able  to  realise  its  loans  instantly  on  the  day  of  trouble ; 
but  if  the  element  of  suspicion  were  absent,  if  the  de 
positors  knew  for  a  certainty  that  they  were  really  safe, 
the  quality  of  this  danger  would  be  very  mild.  In  the 
worst  crisis  the  tendency  of  deposits  at  the  Bank  of 
England  is  not  to  diminish  but  to  increase.  The  Bank  of 
England  can  lend  largely  in  a  crisis,  precisely  because  no 
one  is  impelled  by  fright  to  make  a  run  upon  it.  If  con 
fidence  were  complete,  as  here  supposed,  the  Bank  might 
even  lend  its  last  farthing,  and  yet  be  in  no  danger. 
The  situation  would  be  known,  and  its  signature, 
even  if  its  reserve  of  gold  had  dwindled  down  to 
a  trifle,  would  be  accepted  by  any  trader;  it  would 
be  as  good  to  him  as  money,  the  distinguishing  charac 
teristic  of  a  panic  being  absent — distrust.  Thus,  in 
the  agony  of  1866,  one  of  the  most  eminent  banks  in 
London  was  in  some  peril,  simply  because  its  deposits 
were  immense,  and  the  feeling  was  not  perfect  that  it 
had  lent  with  entire  safety.  No  doubt  if  banks 
were  always  to  lend  with  perfect  prudence — such  as  is 
often  seen  in  agricultural  banks,  whom  the  tempest  in 
the  money-market  seldom  even  shakes — safety  would  be 
procured  at  the  cost  of  many  fairly  promising  enterprises 
deriving  no  help  from  banks  ;  but  security  against  panics 
is  a  benefit  of  the  highest  value,  and  careless  banking  un 
doubtedly  promotes  the  diminution  of  a  nation's  capital. 
It  is  an  invariable  sequence  of  a  crisis  that  the  industry 
of  a  nation  is  for  a  period,  more  or  less  long,  paralysed. 


WHAT  IS  A  BANK  f  145 

There  is  prostration  of  trading  strength.  Labourers 
are  thrown  out  of  employment,  wages  fall,  new  works 
are  not  commenced,  or  are  at  a  stand-still.  Mr 
Brassey,  in  his  interesting  book  on  "  Work  and  Wages," 
has  described  the  position  of  the  railway  construction 
industry  after  crises,  its  violent  recoil  from  vehement 
demand  for  labour  and  abnormal  wages  into  the  depths 
of  paralysis.  The  ordinary  language  of  the  press  of  all 
countries  on  the  specific  effect  of  the  panic  in  the  money- 
market  is,  as  before  remarked,  that  it  is  the  consequence 
of  a  monetary  crisis.  This  is  a  complete  mistake.  The 
blow  which  cripples  trade  and  industry  is  always  struck 
before  the  panic.  As  said  above,  the  panic  is  an  agon 
ising  inquiry,  Who  is  to  lose  ?  on  whom  is  the  loss  to 
fall  ?  But  the  loss  invariably  has  preceded.  The  bank 
ing  market  is  a  huge  mass  of  creditors  and  debtors.  The 
wealth  has  perished — which  creditors  are  safe  ?  which 
lose  ?  Which  debtors  will  pay  ?  which  not  ?  That  is 
the  terror  of  Lombard  Street.  There  is  no  destruction 
of  capital  in  the  money  market,  for  it  is  absolutely 
destitute  of  capital.  The  merchant  who  got  his  bill 
discounted — that  was  done  in  the  money  market — 
bought  corn ;  what  has  he  done  with  it  ?  The  corn 
has  been  eaten.  Then  what  did  the  eaters  reproduce 
in  its  place  ? — anything  or  nothing  ?  The  eating  of  the 
corn  is  wholly  outside  of  the  money  market ;  and  it  is 
because  the  corn  and  other  wealth  have  been  destroyed 
that  the  banking  market  is  let  in  for  a  settlement  of 


146  CRISES  STOP  NEW  UNDERTAKINGS. 

losses.  One  effect,  however,  it  must  be  freely  admitted, 
the  monetary  crisis  does  produce  in  causing  that  stop 
page  of  industry  which  Mr  Brassey  describes,  and  it  is 
very  instructive  to  understand  it  rightly.  In  such  enter 
prises  as  railways,  town  improvements,  &c.,  worked  by 
Joint-Stock  Companies,  those  who  take  shares  command 
that  portion  of  the  nation's  wealth  which  belongs  to 
them  to  be  consumed.  Shares  are  seldom  paid  for  out 
of  income,  they  are  investments  of  property.  Each 
new  call  sentences  a  new  portion  of  wealth  to  be  de 
stroyed  for  the  making  of  the  railway,  or  any  other 
object  of  the  Company.  Now  the  panic  stops  this 
process  sharply  and  decisively.  Calls  are  not  paid  ; 
the  shares  are  practically  unsaleable,  which  means  that 
other  owners  of  wealth  will  not  take  the  places  of  the 
former  shareholders,  and  continue  the  destruction  of 
capital.  Thus  particular  enterprises — especially  such 
as  Mr  Brassey  has  cognizance  of — are  brought  to  a 
standstill.  So  far  the  crisis  does  throw  people  out  of 
employment,  but  it  does  this  because  the  wealth  which 
carried  on  the  undertaking  to  the  day  of  stoppage  has 
perished,  and  there  is  none  other  to  take  its  place. 

But  not  only  is  the  disposition  of  shareholders  to 
invest  property  brought  to  an  end  by  the  discovery 
which  is  called  a  crisis,  but  much  other  expendi 
ture  also  terminates  which  was  equally  a  destruc 
tion  of  capital.  A  prosperous  time  of  such  specula 
tion  as  consists  of  applying  capital  to  new  undertakings, 


WHAT  IS  A  BANK  t  147 

with  its  premiums  and  its  demand  for  labour,  invariably 
leads  to  an  increase  of  expense  of  living.  As  already 
explained,  if  all  England  took  to  eating  and  drinking 
up  and  consuming  everything  in  the  land  in  one  year, 
the  abundance  and  luxury  and  enjoyment  of  riches 
would  be  what  the  world  had  never  seen.  The  same 
process  goes  on  upon  a  smaller  scale  when  the  specula 
tion  which  orders  the  consumption  of  capital  on  unpro 
ductive  undertakings  is  in  full  play.  Workmen  earn 
higher  wages,  contractors  earn  larger  profits,  dealers  in 
the  money  market  gather  up  fortunes,  and  every  one 
spends  freely,  even  lavishly.  This  spending,  this  con 
sumption  is  not  of  savings,  not  of  wealth,  commodities, 
which  were  a  surplus  over  and  above  the  ordinary  rate 
of  living,  but  of  capital,  of  wealth  appropriated  to 
industry.  The  day  of  crisis  arrests  all  this,  so  that  here 
again  the  monetary  panic  acts  on  the  labour  markets  of 
every  land.  But,  as  before  remarked,  it  is  the  destruction 
which  preceded  the  day  of  panic  which  renders  the  loss 
so  long  irretrievable. 

We  thus  obtain  the  explanation  of  the  long  depres 
sion  of  trade  which  follows  a  crisis.  The  destruction  of 
capital  which  yields  no  return  is  arrested  ;  the  capital 
lost  it  takes  a  very  long  time  to  replace,  not  seldom 
years.  Then  succeeds  a  period  of  calm,  whilst  the  les 
sons  of  the  bitter  past  still  live  in  the  public  memory. 
People  are  shy  of  entering  upon  new  schemes  which 
consume  wealth  which  cannot  be  restored  for  years. 


148  WHAT  SAVINGS  ARE. 

But  confidence  gradually  revives,  excitement  begins  to 
raise  its  head  again,  projects  for  making  new  railways, 
docks,  beautifying  towns,  and  the  like,  reappear,  and  the 
decennial  law,  supposed  by  Economical  philosophers 
like  Mr  Mill,  verifies  itself  in  a  new  crisis.  It  is  no  law 
of  trade,  however,  no  condition  imposed  by  nature  on 
its  machinery,  but  a  law  of  human  feeling.  There  is  no 
inherent  necessity  for  such  recurring  periods ;  they 
spring  from  moral  forces,  and  by  moral  forces  they  may 
be  annulled.  Let  bankers  learn  the  lessons  which  they 
teach ;  let  them  reflect  on  the  nature  of  the  schemes 
which  they  support,  not  their  soundness  only — for  it  may 
be  admitted  that,  as  a  whole,  they  do  not  support 
unsound  projects — but  the  capacity  of  the  national 
capital  to  execute  them  at  the  time  without  temporary 
disaster.  Above  all  let  the  promoters  of  new  enter 
prises  study  political  economy,  and  learn  the  meaning 
of  the  word  savings  ;  they  will  then  know  that  savings 
are  the  excess  of  goods  made  above  goods  consumed, 
and  that  it  is  this  excess  alone  which  can,  without 
impoverishment  and  consequent  trouble  to  the  money 
market,  be  applied  to  new  undertakings.  On  the  percep 
tion  of  this  law,  and  obedience  to  what  it  prescribes, 
depend  the  prevention  of  panics  and  crises. 

But  it  may  be  asked — How  can  one  discover  whether 
a  nation  is  devoting  to  unremunerative  enterprises  more 
than  the  amount  of  its  savings  ?  What  banker  is  up  to 
such  a  task  ?  It  may  not  be  easy ;  but  it  is  none  the 


WHAT  IS  A  BANK?  149 

less  a  natural  and  imperative  duty  ;  and  it  is  not  impos 
sible.  The  education  of  bankers,  by  study  and  experi 
ence  may  do  much  in  this  matter ;  the  signs  of  the  times 
may  be  read,  if  only  the  observing  faculty  and  the 
intelligence  to  understand  are  present.  More  especially 
must  they  cease  thinking  about  the  reserve  of  gold  being 
a  little  greater  or  a  little  smaller,  or  indeed  about  money, 
cash,  and  the  state  of  the  circulation.  They  will  never 
understand  the  world  they  live  and  act  in  so  long  as  such 
matters  occupy  their  best  attention.  The  Bank  of 
England  sets  an  example  of  much  judgment  in  this 
matter  ;  it  is  not  given  to  make  loans  to  schemes  which 
must  necessarily  consume  much  capital  that  cannot  be 
quickly  replaced.  No  one  has  accused  it  of  helping  on 
the  construction  of  new  railways  in  uninhabited  regions, 
or  even  of  new  lines  carelessly  in  settled  countries  ; 
unlike  the  House  of  Overends,  it  does  not  scatter  its 
resources  over  half  the  world.  If  bankers  practised 
universally  banking  as  good  as  that  of  the  Bank  of 
England,  business  would  be  steadier  and  disasters  less 
frequent  and  less  ruinous.  If,  on  the  contrary,  they 
grasp  at  every  large  profit  that  presents  itself,  the  cause 
for  mischief  exists  at  once,  and  it  will  be  realised. 

But  what  is  to  be  done  when  a  crisis  is  on  ?  How  is 
it  to  be  alleviated  ?  The  settlement  of  losses  cannot  be 
avoided  ;  they  have  been  incurred,  and  they  must  be 
endured  by  those  upon  whom  they  necessarily  fall.  But 
that  which  is  the  specific  calamity  of  a  crisis,  the  panic, 


ISO  CERTIFIED  CHEQUES. 

the  suspicion,  the  alarm  and  its  wild  consequences,  may 
undoubtedly  be  lessened.  The  great  object  is  to  pre 
vent  frightened  people  from  rushing  to  demand  payment 
of  their  debts  from  banks  and  commercial  houses,  to 
build  up  rational  confidence  when  no  specific  cause  for 
distrust  can  be  shown,  to  leave  banks  in  possession  of 
resources  of  supreme  value  at  such  an  hour  for  the 
maintenance  of  discount  to  commerce.  It  must  be  said, 
however,  that  Mr  Hubbard  declared  in  the  House  of 
Commons,  that  no  firm,  capable  of  giving  security, 
ever  failed  to  get  accommodation  in  a  crisis ;  and 
let  those  who  are  ever  talking  of  the  state  of  the 
gold  think  much  about  this  declaration.  The  greatest 
force  that  can  be  brought  to  bear  at  such  a  moment  is 
an  institution  like  the  Bank  of  England,  whose  excellent 
banking  bestows  on  it  unassailable  credit.  Men  of 
banking  experience  urge  the  Bank  in  crises  to  lend  freely; 
that  it  does  lend  thus  freely,  the  enormous  loans  in  1866, 
amounting  to  thirty-three  millions,  amply  testify.  But 
still  more  is  demanded  in  this  direction,  and  there  is 
some  reason  for  thinking  that  the  requirement  is  well 
founded.  It  is  remarkable  that  in  the  teeth  of  a  heavy 
increase  of  its  liabilities  there  is  always  a  well-defined 
tendency  in  crises  for  deposits  to  augment  at  the  Bank 
of  England.  They  are  removed  from  suspected  banks, 
and  the  suspension  of  mercantile  operations  leads  traders 
to  place  their  funds  in  its  keeping  for  a  while.  The  limit 
of  the  Bank's  lendings,  of  course,  must  ultimately  be  left 


WHAT  IS  A  BANK  ?  '  I  5  I 

to  the  judgment  of  its  managers  ;  it  is  for  them  to  esti 
mate  the  extent  to  which  their  depositors  may  draw 
upon  them.  A  saviour  for  them  and  the  money  market  is 
always  supposed  to  be  in  reserve  in  the  suspension  of 
the  Bank  Charter  act ;  but  that  has  been  shown  above 
to  be  a  fallacy. 

A  practice  adopted  in  the  crisis  of  1873  in  the  money 
market  of  New  York  suggests  a  resource  which  might 
be  available  in  England,  if  necessity  should  call  for 
something  exceptional.  The  banks  associated  them 
selves  together,  and  the  association  certified  cheques — 
that  is,  they  gave  a  collective  guarantee  for  the  ultimate 
payment  for  cheques  which  they  refused  in  the  crisis 
to  pay  when  presented.  Creditors  thus  obtained  com 
plete  security  against  ultimate  loss,  and  an  immense 
amount  of  vague  alarm  was  calmed  down.  These 
certified  cheques  passed  extensively  as  money — no  one 
doubted  their  solvency ;  the  holders  could  use  them  in 
effecting  payments  and  purchases.  Such  a  practice 
could  not  be  directly  imitated  in  London,  as  the  law 
declares  the  refusal  to  pay  a  cheque  to  be  an  act  ot 
insolvency,  but  a  variation  of  form  might  secure  the 
substance  of  the  relief  for  the  money  market  of  London. 
The  Bank  of  England  might  issue  certificates,  either 
bearing  interest  or  not,  payable  at  a  deferred  period 
more  or  less  long.  These  certificates  would  differ  from 
bank-notes  in  this  important  peculiarity,  that,  unlike 
bank-notes,  they  could  not  be  returned  to  the  Bank  at 


152    A  RUN  ON  THE  BANK,  BUT  FOR  NOTES. 

once  and  drawn  against ;  they  would  remain  out  neces 
sarily  in  circulation,  which  bank-notes,  as  the  history  of 
suspensions  shows,  refuse  to  do.  They  would  not  cir 
culate  amongst  the  general  public,  but  be  purely  com 
mercial  paper.  Multitudes  of  creditors,  especially  those 
whose  sole  motive  for  claiming  payment  was  suspicion 
and  alarm,  would  be  satisfied  with  the  assurance  fur 
nished  by  these  certificates  that  their  claims  were  safe ; 
they  would  retire  from  the  frightened  crowd  that  was 
keeping  up  the  crisis.  On  the  other  hand,  the  Bank 
would  not  issue  such  documents  unless  perfectly 
assured  of  its  own  safety  by  the  protection  of 
thoroughly  sound  security.  Property  is  often  unsale 
able  in  the  day  of  crisis  which  a  fortnight  later 
recovers  all  its  value.  The  Bank  would  escape  the 
danger  of  sudden  demands  of  its  liabilities — for  these 
would  have  a  deferred  date  of  payment  stipulated.  It 
would  bestow  help  by  means  of  pledges,  which  in 
reality  would  seldom  or  never  be  exacted.  It  is 
reasonable  to  believe  that  effectual  aid  against  pure 
alarm  and  suspicion  might  be  derived  from  such  a 
proceeding. 

But  what  shall  be  said  of  gold  ?  Is  not  that  the 
resource  on  which  a  panic-struck  market  must  ultimately 
rely  for  salvation  ?  In  the  first  place,  the  sole  motive 
for  a  reserve  of  gold  in  banking  is  the  danger  of 
deposits  being  drawn  out  faster  than  the  loans  granted 
by  the  bank  return  back  to  its  till ;  and  thus  it  might 


WHAT  IS  A  BANK  ?  153 

come  to  a  stoppage,  though  perfectly  sound  and 
solvent.  Under  this  general  law  the  Bank  of  England 
falls  like  every  other  bank ;  but  does  it  appear  that  the 
Bank  in  any  crisis  ever  ran  a  true  and  real  risk  of 
stoppage  from  the  absence  of  an  insufficient  reserve  of 
gold  ?  The  nearest  approach  to  such  a  danger  occurred 
in  1825.  There  was  a  run  on  the  Bank  by  depositors. 
For  gold  ?  In  no  way.  The  run  was  to  procure 
the  notes  of  the  Bank  itself  by  men  who  trusted 
the  Bank  perfectly,  but,  in  the  then  knowledge 
of  banking,  feared  that  the  Bank  would  lend  those 
bank-notes  to  other  people,  and  would  not  have 
them  ready  when  these  notes  were  wanted  to  face 
the  engagements  of  themselves,  the  depositors.  The 
Bank  was  saved  from  declaring  that  it  had  no  ready- 
money  by  the  discovery  of  a  million  of  unburnt  one- 
pound  notes.  Evidently  then  paper  sufficed  as  a 
reserve — the  credit  of  the  Bank  was  perfect,  and  that 
was  enough.  Mr  Bagehot,  the  advocate  of  a  large 
reserve,  distinctly  admits  in  "  Lombard  Street "  that 
the  panic  of  1825  was  stopped  with  notes.  This  admis 
sion,  by  itself  alone — for  it  was  made  of  the  greatest  run 
on  the  Bank — overthrows  his  doctrine  of  the  necessity  of 
a  large  reserve  of  gold.  The  same  lesson  is  taught  by 
the  oft-repeated  reference  to  the  suspensions  of  the 
Bank  Act.  Mr  Bagehot  incessantly  dwells  on  the 
assistance  received  by  the  Bank  from  these  suspensions. 
He  contends  that  the  Bank  would  have  failed  without 


154  IN  CRISES  THE  RESERVE  UNUSED. 

them.  He  forgets  that  the  immediate  effect  of  these 
suspensions,  as  I  have  shown,  was  absolutely  nil.  He 
forgets  too,  that  in  1825,  as  he  confesses,  the  Bank 
did  not  fail,  and  there  was  no  gold  to  help  it.  But 
even  supposing  that  these  suspensions  had  saved  the 
Bank,  would  it  have  been  by  pouring  into  it  streams  of 
gold  ?  Just  the  very  contrary.  The  suspension  gave 
leave  to  the  Bank  to  issue  more  paper  without  gold, 
and  the  salvation  would  have  come  from  the  Bank's 
own  notes,  its  own  credit,  the  willingness  of  the  public 
to  trust  it,  but  not  from  an  additional  ounce  of  gold. 
Yet  the  saving  power  of  these  suspensions  is  appealed 
to  by  a  writer  whose  one  cry  is  that  the  Bank  ought  to 
pile  up  a  huge  reserve  of  gold.  These  are  crushing 
proofs  that  much  gold  is  not  needed  for  the  Bank's 
safety.  Nay,  when  there  is  gold  in  the  Bank,  the  crisis 
cannot  draw  it  out — the  gold  remains,  in  the  worst  of 
the  agony,  a  reserve,  an  unused  reserve  still.  It  is  not 
lent — plainly  because  the  public  does  not  want  it. 
Borrowers  of  tens  of  thousands  do  not  take  them  out  in 
gold,  even  in  a  panic.  The  Bank's  own  paper  suffices. 
In  1866,  as  we  have  seen,  the  Bank's  loans  rose  in  a  fort 
night  from  eighteen  to  thirty-three  millions,  yet  the 
gold  sank  only  two  millions.  But  these  facts,  in  the 
present  state  of  the  City's  knowledge,  do  not  attract  a 
moment's  notice. 

These  same  facts  abundantly  prove  that  gold  is  not 
the  instrument  with  which  panics  are  healed,  and  that 


WHAT  IS  A  BANK  ?  155 

no  argument  can  be  derived  even  from  the  time  of  great 
alarm  for  the  maintenance  of  a  huge  reserve  at  all 
times  in  the  Bank  of  England.  But  facts  and  accurate 
reasoning  count  for  little  in  the  City.  "  The  public," 
cries  Mr  Bagehot,  "  has  faith  in  the  Bank  contrary  to 
experience  and  evidence ;  the  English  world  believes 
that  the  Bank  of  England  will  not,  almost  that  it  can 
not  fail."  What  evidence  ?  What  experience  ?  The 
Bank  does  not  fail ;  that  the  public  sees  and  accounts 
evidence.  The  object  of  a  great  reserve,  its  advocates 
proclaim,  is  to  inspire  confidence  in  the  public.  But 
the  public  has  confidence  already,  and  is  not  de 
ceived.  It  had  confidence  in  1825,  though  there 
was  no  reserve.  The  public  does  not  require  a 
fine  theory  about  a  large  reserve  ;  it  possesses 
evidence,  fact ;  it  finds  that  the  Bank  has  reserve  in 
abundance.  That  reserve  has  proved  sufficient  up  to 
this  day;  it  has  done  its  work.  It  carried  the  Bank 
through  1825,  1847,  1857,  and  1866;  and  unless 
England  is  invaded,  are  worse  crises  than  these  to 
be  taken  as  the  basis  of  calculation  ?  A  reserve 
which  weathers  such  storms  is  indisputably  enough. 
If  the  Bank  had  had  more  gold  in  those  years, 
could  it  have  lent  more  to  traders,  and  mitigated 
the  panic?  It  1825  all  it  needed  was  a  larger 
supply  of  printed  paper.  In  1847  and  1866  it  had  all 
the  gold  which  the  Suspensions  set  free  and  could  not 
lend  it.  In  1857  it  lent  £800,000  of  such  gold,  but 


156       CITY  VAINLY  WATCHES  MOVEMENTS  OF  GOLD. 

there  was  a  large  stock  still  to  spare,  imlent,  in  the 
liberated  Issue  Department. 

We  are  thus  brought  to  the  ordinary  doctrine  of  the 
City,  that  when  gold  ebbs  away  discount  is  bound  to  be 
dear,  when  it  flows  into  the  Bank  the  rate  is  necessarily 
easier.  Hence  the  daily  movements  of  gold  are  carefully 
recorded  :  they  are  held  to  explain  the  banking  state  of 
the  day,  and  to  supply  the  means  of  estimating  the 
immediate  future  of  the  money  market.  Accordingly 
the  exchanges  are  watched  with  interest ;  a  favourable 
exchange  announces  ease  ;  an  adverse  exchange  calls 
for  counter  action  by  raising  the  rate  of  discount,  and 
thus  tempting  foreign  money,  as  it  is  called,  to  flow  into 
the  country.  Great  stress  is  laid  on  this  self-acting  con 
trivance;  the  writers  who  expounded  its  wonder-working 
power  are  rewarded  with  fame.  The  Bank  is  pro 
nounced  strong  when  its  reserve  increases,  and  this 
reserve  is  measured  by  the  proportion  which  its  gold 
bears  to  the  Bank's  liabilities.  The  whole  mercantile 
world  thinks  it  natural  that  if  half-a-million  has  left  the 
Bank's  cellar,  every  trader  who  has  a  bill  to  dis 
count  should  be  made  to  pay  a  heavier  charge,  and 
when  half-a-million  has  come  in,  the  Bank-rate  should 
be  lowered.  The  absurdity  of  such  an  artificial  rule 
becomes  transparent,  in  the  presence  of  the  fact  that 
the  Bank  in  crises  is  not  saved,  nor  enabled  to  lend 
by  gold,  nay,  that  confidence  in  its  stability  in  such 
seasons  is  not  affected  by  the  quantity  of  its  bullion. 


WHAT  IS  A  BANK  ?  157 

The  marvel  is  that  traders  will  not  learn  the  nature  of 
banking,  and  thus  save  themselves  from  being  victimized. 
The  great  events  of  panics,  when  they  come  on,  lie  out 
side  of  the  state  of  the  gold.  And  this  being  so,  what 
must  be  thought  of  a  rule  which  taxes  traders  according 
as  the  metallic  treasure  is  a  little  larger  or  a  little 
smaller — a  treasure  which  must  be  kept  locked  up  in 
vaults,  which  does  not  add  a  single  shilling  to  the 
lending  power  of  the  Bank,  which  cannot  be,  and  is  not 
lent,  because  the  public  refuses  to  have  or  keep  this 
gold  unless  ready-money  transactions  have  increased. 
If  in  the  summer  travelling  expands,  and  harvest 
labourers  require  sovereigns — gold  which  is  sure  to 
return — up  ought  to  mount  the  Bank-rate,  to  the  profit 
of  the  Bank,  and  to  the  injury  of  the  whole  trade  of  the 
kingdom.  If  the  harvest  threatens  to  be  bad,  and  pur 
chases  of  corn  are  being  made  abroad,  an  export  of  gold 
naturally  takes  place,  but  the  loss  of  that  gold  is  be 
wailed  in  the  City  ;  it  was  bound  to  remain  locked  up 
in  the  Bank's  vault.  The  object  of  a  reserve,  according 
to  the  City,  is  not  to  be  used  in  the  hour  of  difficulty,  but 
to  remain  ever  buried.  The  loss  to  the  capital  of  the 
nation  by  the  destruction  of  its  harvest,  and  the  necessity 
of  paying  with  its  products  for  its  food  twice  over  does  not 
excite  a  moment's  thought ;  the  gold,  the  lost  gold, 
the  gold  which  has  escaped  from  its  prison,  is  in  every 
one's  mind,  and  trade  must  be  taxed  to  recover  the 
fugitive.  Is  this  the  language  or  the  thinking  of  sen- 


1  58         BANK  NOT  WEAKER  FOR  LOSING  GOLD. 

sible  men  ?  Have  these  persons  the  faintest  con 
ception  of  what  currency  is  ?  The  City  boasts  to 
be  a  body  of  practical  men — do  they  ever  look  at 
stern,  truthful  figures  ?  The  last  pressure  of  very 
high  discount  in  England  occurred  in  the  autumn 
of  1873  ;  what  do  we  find  in  that'  year?  On 
October  17  a  rate  of  6  per  cent,  with  a  reserve  of  35^ 
of  the  liabilities.  Three  weeks  later  the  same  reserve, 
but  a  rate  2  per  cent,  higher.  On  November  21  the 
rate  rises  from  8  to  9  per  cent.,  but  in  the  teeth  of  the 
doctrine  of  the  City,  the  reserve  goes  up  from  34^  to 
On  November  28  we  meet  with  a  reserve  of 
5,  and  discount  at  6  per  cent.  But  what  says  the 
return  of  January  1874?  The  same  reserve — 46  ratio 
of  reserve  to  liabilities ;  but  the  rate  of  discount,  what 
is  it  ?  3j£  per  cent  Is  it  not  humiliating  to  hear 
men  exclaim,  day  after  day,  that  the  money  market  is 
easier  or  harder,  because  some  half-million  of  gold  has 
come  in  or  gone  away,  in  the  presence  of  figures  which 
show  such  language  to  be  pure  nonsense  ? 

What  is  the  harm,  the  specific  harm,  of  some  three  or 
four  millions  of  gold  thus  departing  to  foreign  countries 
for  food  ?  The  Bank  is  weaker ;  but  what  is  the  meaning 
of  this  word,  weak  ?  That  the  Bank  is  in  danger  of  not 
meeting  its  engagements,  of  coming  to  a  stoppage  ?  The 
supposition  is  too  ridiculous  to  deserve  notice.  The 
33  millions  of  1866  crush  out  this  absurdity.  A  bank 
is  strong  or  weak  according  as  its  banking  is  good  or  bad, 


WHAT  IS  A  BANK  ?  159 

according  as  its  resources  derived  from  the  sale  of  goods 
are  large  or  small,  and  those  to  whom  it  has  lent  have 
preserved  or  destroyed  the  commodities  which  they  pur 
chased  with  the  Bank's  loans.  What  in  the  world  has 
the  escape  of  three  or  four  millions  to  America  to  fetch 
food  for  a  starving  people  to  do  with  this  banking  ? 
There  are  no  bad  debts  involved  in  the  departure  of 
the  gold,  no  chance  of  the  Bank  or  the  whole  banking 
community  losing  one  penny  by  the  operation.  When 
the  foreigners  in  turn  begin  to  buy  commodities  with 
this  gold,  to  replace  the  corn  they  sent  away,  the  gold 
is  certain  to  return.  What  shadow  of  a  pretext  is 
there  in  all  this  to  raise  the  Bank-rate  because  the  gold 
has  left  the  cellar  and  set  out  on  its  travels  ? 

And  if  the  taking  out  of  the  gold  for  exports  pro 
ceeded  still  further,  and  the  requirements  of  this 
trade  in  corn  absolutely  required  an  additional  supply, 
what  so  easy  or  so  unobjectionable  as  that  the  Bank 
should  buy  gold  in  some  adjoining  country  ?  No 
unsoundness  of  trade  would  be  existing  under  the  cir 
cumstances  supposed,  no  danger  of  commercial  failures 
or  revelations  of  unsound  banking ;  a  particular  com 
modity  would,  from  special  causes,  be  in  deficient 
supply,  and  the  Bank  would  be  required  to  buy  an 
increase  of  gold  when  it  could  be  procured.  Well  does 
the  Times  remark,  on  October  15,  1873,  "gold  being 
a  commodity  which  is  always  obtainable  in  unlimited 
quantities  and  with  singular  speed  by  the  highest  bidder 


i6o 

among  commercial  nations,  there  can  never  be  such 
difficulty  in  attracting  it  as  to  cause  the  slightest  incon 
venience  to  any  community  whose  transactions  have 
been  based  on  legitimate  credit."  What  but  the  terror 
of  ignorance  and  prejudice  could  associate  the  idea  of 
danger,  or,  as  some  phrase  it,  of  ignominy,  with  such  an 
operation  ?  Good  banking  is  the  King  of  the  Money- 
market,  banking  which  lends  intelligently  and  wisely : 
under  its  rule,  what  happens,  to  gold  matters  nothing, 
either  for  danger  or  for  crises. 

I  may  be  allowed,  I  trust,  to  repeat  that  which  ap 
peared  in  the  Times  of  Nov.  15,  1873  :  the  quotation 
it  commences  with  shows  that  even  in  the  City  a  sense 
of  shame  broke  out  at  the  deplorable  irrationality  of 
City  doctrines  and  practices  about  gold. 

"Sir, — Your  City  article  of  to-day  contains  the 
following  remarkable  sentence  : 

" '  That  the  events  which  have  been  witnessed  should 
have  actually  occurred  is  a  disgrace  to  the  intelligence 
of  all  parties  concerned.' 

"  And  what  has  been  the  cause  of  this  disgrace  ?  One 
which  is  implied  in  the  remainder  of  the  sentence — 
'  and  this  fact  becomes  still  more  apparent  when  it  is 
considered  that,  but  for  the  service  of  the  electric  tele 
graph  in  announcing  each  parcel  of  gold  about  to  be 
shipped  hither,  the  panic  would  have  gone  on  until  its 
mere  prolongation  might  have  spread  alarm  in  other 


WHAT  IS  A  BANK  ?  1 6  f 

quarters  and  led  to  serious  disasters.'  There  can  be  no 
doubt  of  the  truth  of  this  remark,  but  is  it  possible  to 
describe  more  vividly  wilful,  self-made  calamity  and 
ruin  brought  on  by  an  artificial  cause  artificially  be 
lieved  in  ?  The  City  has  trained  itself  to  believe  that  a 
quantity  of  a  particular  metal  called  gold,  lying  in  a 
vault  unused  and  unusable,  is  the  physical  cause  of  the 
rate  of  discount,  profoundly  regardless  of  the  fact, 
which  a  reference  to  the  Reports  of  the  Bank  of 
England  would  at  once  have  pointed  out,  that  all  sorts 
of  rates  of  discount  have  accompanied  and  do  accompany 
all  sorts  of  reserves  of  gold.  Instead  of  studying  the 
state  of  trade  and  speculation  in  other  countries  as  well 
as  in  England,  its  eyes  are  fixed  on  the  glittering  heap, 
and  when  it  declines  the  usual  consequences  of  unscien 
tific  and  purely  imaginative  beliefs  arise,  blind  terror 
seizes  upon  the  mind,  and  men  perform  deeds  which  are 
nothing  less  than  simple  suicides.  Every  man  frightens 
his  neighbour  :  every  one  sees  impossibility  to  obtain 
advances  hanging  over  his  head,  and  rushes  off  forth 
with  to  make  himself  safe  by  borrowing  from  the  banks 
long  before  he  has  need  of  their  loans  :  the  banks  be 
come  shy  of  lending,  and  up  flies  the  charge  for  that 
discount  which  is  the  foundation  of  modern  trade. 
And  what  is  the  parent  of  all  this  agony  and  this  dis 
aster  ?  A  diminished  heap  in  the  Bank's  cellar,  as  if 
the  Bank  was  going  to  stop  payment,  if  for  a  few  days 
it  had  only  half  of  its  accustomed  mass — a  mass,  I 


162 

repeat,  which  does  nothing  for  commerce  except  pre 
vent  banking  from  coming  to  a  stand-still.  The  move 
ments  of  gold  to  or  from  the  Bank  may  be  important 
as  tending  to  reveal  forces  which  are  acting  upon  trade, 
just  as  the  foreign  exchanges  teach  us  whether  England 
has  bought  more  or  less  abroad  than  she  has  sold.  But 
these  movements  as  merely  making  the  stock  of  gold  in 
the  Bank  larger  or  smaller  are  not  the  power  which 
makes  discount  cheap  or  dear.  If  they  have  this  effect 
it  is  not  from  their  own  intrinsic  action,  but  from  the 
fictitious  and  absurd  significance  given  to  them  by 
unscientific  ignorance,  and  the  absence  of  the  ability  to 
analyse  facts,  which  is  the  basis  of  all  knowledge.  That 
the  traders  of  England  should,  from  utter  helplessness 
of  thinking  and  their  consequent  surrendering  of  them 
selves  to  all  sorts  of  artificial  dogmas,  build  up  by  their 
own  act,  against  themselves,  such  rates  as  eight,  ten,  and 
twelve  per  cent,  as  we  have  lately  seen,  is  a  wonder  at 

which  I  never  cease  to  marvel. 

BONAMY  PRICE." 

"OXFORD,  Nov.  14,  1873." 

The  convulsion  began  in  September  with  a  reserve  in 
the  Bank  of  £13, 238,000,  and  a  rise  in  the  rate  of  dis 
count  from  3  to  4  per  cent.  It  culminated  in  Novem 
ber,  when  the  reserve  had  fallen  to  ^8,071,000 — and  the 
rate  risen  to  9  per  cent,  as  the  minimum,  but  when  the 
majority  of  the  loans  granted  by  the  bank  had  exacted 
a  rate  actually  of  12  per  cent.  The  ratio  of  reserve  to 


WHAT  IS  A  BANK  ?  1  63 

liabilities  on  September  24th  was  44  per  cent,  on  Nov 
ember  5,  36.  Upon  the  doctrine  of  the  City,  a  reserve 
of  eight  millions  of  stored-up  gold,  capable  of  paying 
off  36  per  cent,  of  what  the  Bank  owed,  justified  a 
blistering  charge  of  nominally  9,  really  of  12  per  cent, 
on  the  loans  taken  out  by  the  trade  of  the  nation  from 
banks,  and  a  crisis  was  averted  by  the  news  that  gold 
had  been  put  on  board  of  ships  on  the  other  side  of  the 
Atlantic  Ocean.  What  kind  of  conception  of  the 
action  of  currency,  and  the  nature  of  banking,  must  those 
have  had  who  found  comfort  in  this  preposterous 
belief?  That  corn  should  fall  in  price  in  a  famished 
town  when  a  fleet  of  corn  ships  is  announced  to  be  in 
the  offing  is  intelligible ;  food  to  eat  is  at  hand :  but 
what  can  gold  do  when  it  comes  ? 

Other  causes  than  the  amount  of  gold  at  the  Bank, 
we  may  be  quite  sure, — causes  arising  out  of  the  state  of 
the  wealth  of  the  nation,  out  of  the  destruction  of  pro 
perty,  and  the  agonizing  uncertainty  by  whom  the  loss 
would  have  to  be  borne — generated  this  violent  commo 
tion  in  the  money  market :  but  neither  bankers  nor 
traders  think  of  these  causes,  and  one  result  is  the 
wanton  imposition  of  a  heavier  charge  for  discount  if 
some  insignificant  sum  of  gold  has  been  withdrawn  from 
the  Bank.  Thus  the  attention  is  called  away  from  wealth 
itself  to  the  machinery  which  transfers  its  ownership, 
and  what  constitutes  sound  and  safe  banking  is  made 
to  depend  on  an  empirical,  unscientific  and  false  rule. 


164     THE  LAW  OF  SUPPLY  AND  DEMAND. 

If  the  cart  only  is  thought  of  and  not  the  goods  con 
tained  in  it,  people  must  not  be  surprised  if  every  kind 
of  charge  is  made  for  cartage.  What  is  happening  to 
the  two  principals  of  every  banker,  whether  the  deposi 
tor  has  much  or  little  remaining  of  what  he  has  sold 
compared  with  what  he  has  bought,  and  whether  the  bor 
rower  of  the  purchasing  power  which  the  bank  derived 
from  the  depositor  and  transferred  to  him  has  preserved 
or  consumed  the  wealth  he  bought  with  it,  alone  con 
tain  the  secret  of  the  money  market,  alone  explain  the 
events  of  the  banking  world. 

Hence^as  a  rule,  the  banking  market  is  governed  by 
the  universal  law  of  supply  and  demand.  Each  of  these 
forces  may  vary,  with  corresponding  results  on  the  price 
of  the  article  dealt  in,  purchasing  power.  Trade  may  be 
steady  for  a  long  period,  with  regular  movements  and 
uniform  growth  ;  the  rate  of  discount  at  such  times  will 
be  moderate  and  little  given  to  fluctuations.  Or  new  and 
profitable  fields  for  the  application  of  capital,  such  as  the 
rapid  development  of  colonies,  and  the  demand  for 
capital,  may  increase  much  faster  than  capital  itself;  a 
high  rate  will  be  the  consequence,  and  it  will  not  be  felt 
to  be  oppressive^)  Again,  particular  trades  may  have 
fallen  under  disturbing  influences  ;  a  cotton  famine  may 
suddenly  overtake  Lancashire,  or  commotions  in  the 
labour  market  may  interfere  grievously  with  the  condition 
of  the  iron  and  coal  trades,  or  costly  mining  adventures 
may  come  to  an  abrupt  end.  In  such  cases,  capital  will 


WHAT  IS  A  BANK?  165 

tend  to  be  thrown  out  of  employment ;  its  field  of  action 
will  be  narrowed,  and  the  charge  for  discount  will 
look  downward.  Such  are  the  general  forces  which 
rule  the  rate  of  interest  at  banks  ;  but  trade  and  its 
fluctuations,  the  action  of  political  and  social  influences 
on  the  development  of  wealth,  the  likelihood  of  the 
increase  or  the  diminution  of  profits,  the  probabilities  of 
deposits  becoming  larger  or  smaller,  in  a  word  the  whole 
field  of  capital,  its  employment,  and  the  returns  it  pro 
mises  to  yield,  are  matters  far  too  wide  and  too  elaborate 
for  the  powers  in  the  money  market  to  study.  It  is 
easier,  more  ready  at  hand,  to  look  at  money,  at  gold, 
at  the  stock  of  it  in  banking  vaults,  at  the  amount  of  the 
circulation  moving  about  the  country,  at  the  machinery 
which  moves  wealth,  instead  of  wealth  itself.  Under  the 
influence  of  such  ideas  fanciful  and  arbitrary  rates  of 
discount  may  be  ever  springing  up.  It  is  true  these 
arbitrary  dogmas  about  quantities  of  circulation,  rising  or 
falling  reserves,  exports  or  imports  of  gold,  ratios  of 
bullion  to  liabilities,  are  everlastingly  refuted  by  the 
facts  of  the  rate  of  discounts ;  but  what  matters  it  to 
bankers  ?  they  find  a  profit  in  such  delusions.  But  that 
the  great  body  of  traders  should  tamely  consent  to  be 
the  victims  of  such  empirical  assertions,  and  of  such  unen- 
quiring,  unscientific  literature — that  they  should  run  as 
greedily  as  bankers  into  these  doctrines  about  gold, 
never  dreaming  of  looking  whether  these  dicta  about 
gold  correspond  with  fact — that  they  should  be  so  pro- 


1 66       THE  CURRENCY  OF  THE  UNITED  STATES. 

foundly  averse  to  study  the  nature  and  laws  of  trade, 
and  be  content  to  accept  every  kind  of  quack  assertion 
of  monetary  oracles  about  the  magical  effects  of  gold 
being  in  one  place  instead  of  another,  to  their  own 
infinite  perplexity  and  the  grievous  injury  of  their 
fortunes,  is  indeed  surprising.  It  is  the  intellectual 
mystery  of  the  nineteenth  century. — Populus  vult 
decipi : — it  must  take  the  consequences. 

In  conclusion  I  desire  jto  say  a  few  words  on  the  great 
problem  as  well  as  the  great  duty  which  lie  on  the  people 
of  the  United  States.  ^f  hey  are  suffering  from  an  evil  of 
enormous  magnitude,  which  is  entirely  of  their  own 
creation,  and  which  it  lies  perfectly  within  their  own 
power  to  remove.  A  permanently  inconvertible  currency^ 
science  pronounces  to  be  utterly  destitute  of  justification. 
The  continuance  of  such  an  indefensible  practice  in  one 
of  the  most  important  branches  of  social  administration 
would  place  that  great  nation  on  a  level  below  the  intel 
lectual  standard  which  it  has  won  in  the  world)  Were 
it  to  go  on,  their  descendants  hereafter  would  speak  of 
the  want  of  intelligence  it  would  imply  as  the  wonderful 
spot  on  the  great  reputation  they  had  inherited.  The 
suffering,  moreover,  which  it  inflicts  on  the  people,  the 
wanton  corruption  of  one  of  the  most  important 
instruments  of  civilisation,  the  disorder  which  it  thrusts 
upon  all  trade,  the  low  level  at  which  it  tends  to  keep 
the  knowledge  of  political  economy  throughout  the 


WHAT  IS  A  BANK?  167 

country,  the  gambling  spirit  which  it  introduces  into 
commercial  dealings,  constitute  motives  of  commanding 
force  which  summon  the  legislature  of  the  United  States 
to  wipe  away  such  a  disgrace  and  such  a  misfortune. 

The  one  vital  condition  for  the  successful  carrying  out 
of  this  operation  is  a  genuine  and  resolute  determination 
of  the  American  people  to  have  a  currency  worthy  of 
themselves,  and  to  resume  specie  payments  •  fir  earnest. 
Unfortunately  it  cannot  yet  be  said  that  this  resolu 
tion  of  the  national  will  has  been  unmistakeably 
declared.  The  law  orders  the  resumption  of  specie 
payments  on  the  1st  of  January  1879;  Du^  Dv 
providing  no  machinery  for  accomplishing  its  pur 
pose  it  has  rendered  further  appeal  to  Congress 
necessary,  and  till  the  measure  has  finally  left  the 
political  arena,  its  success  cannot  be  said  to  have  been 
secured.  It  was  otherwise  with  the  return  to  cash  pay 
ments  in  England.  The  Bank  of  England  had  been 
forbidden  by  Parliament  to  pay  gold  for  its  notes  on 
presentation.  The  repeal  of  the  prohibition  left  the 
Bank  subject  to  its  old  obligation  to  pay  in  specie,  which 
had  thus  revived.  A  refusal  to  give  gold  for  a  single 
note  would  then  have  plunged  the  bank  into  insolvency. 
But  in  the  United  States  the  Legislature  not  only  pre 
scribes  what  the  currency  shall  be,  but  is  itself  the  issuer 
of  the  currency  ;  and  if  it  does  not  make  the  necessary 
regulations  to  give  effect  to  its  own  command,  there  is 
no  law  of  insolvency  which  would  enable  a  note  holder 


1 68  HOW  CONFIDENCE  CAN  BE  RESTORED. 

not  paid  in  metal  to  seize  the  property  of  the  American 
Government. 

The  renewal  of  the  order  to  the  Secretary  of  the 
Treasury  to  re-commence  the  contraction  of  the  legal 
tender  issues,  which  had  been  regularly  begun  and  then 
was  arrested,  is  the  most  obvious  and,  it  would  seem,  the 
wisest  course  to  adopt.  There  is  no  doubt  that  the 
paper  issues  in  America  are  in  excess;  the  premium 
which  gold  bears  relatively  to  paper,  or,  which  is  the 
same  thing,  the  discount  and  depreciation  under  which 
the  paper  dollars  suffer,  fully  establish  the  fact.  The 
amount  of  the  excess  can  be  discovered  only  by  actual 
trial.  When  the  contraction  is  finally  decreed,  and  its 
execution  commenced,  the  rise  in  the  value  of  the  paper 
dollar  will  gradually  reveal  that  the  excess  has  disap 
peared.  It  was  so  in  England  ;  and  then  the  important 
and  gratifying  fact  was  disclosed  that  the  day  of  re 
sumption  decreed  by  the  law  could  be  anticipated,  and 
the  Bank  gave  gold  for  notes  long  before  it  was  com 
pelled  to  do  so.  There  is  every  reason  to  believe  that 
the  process  of  resumption  would  run  the  same  course  in 
America.  The  certainty  that  the  notes  must  soon 
march  on  equal  terms  with  gold,  and  the  steady  effects 
of  the  continuous  contraction,  would  make  men  feel  in  all 
the  markets  before  the  actual  day  of  positive  fact  ar 
rived,  that  the  paper  and  the  metallic  dollar  were  the 
same  things. 

Many  apprehend  that   contraction   would  create   a 


WHAT  IS  A  BANK  ?  1 69 

deficiency  of  currency  to  the  consequent  injury  of  trade; 
but  this  is  an  entire  mistake.  If  by  contraction  is  meant 
that  there  would  be  too  little  currency  with  gold  and 
notes  convertible  into  gold  to  do  the  work  of  cash  pay 
ments,  of  carrying  out  that  buying  and  selling  which  is 
effected  by  ready  money,  then  such  contraction  would 
cause  inconvenience ;  but  such  a  state  of  things  could 
not  arise  if  notes  were  always  to  be  procured  from  the 
issuers  subject  to  the  obligation  of  redemption  in  specie 
if  demanded.  This  was  before  1844  the  state  of  cur 
rency  in  England  ;  and  assuredly  no  one  complained  in 
those  times  that  currency  was  inconveniently  scarce. 

Moreover,  as  I  have  shown  above,  a  deficiency  of  a 
particular  tool  of  exchange  is  always  of  slight  duration, 
and  is  easily  remedied  in  many  ways.  Smaller  cheques 
would  spring  up  in  abundance,  banking  machinery  be 
more  used,  and  credit,  for  a  while,  in  small  matters  en 
larged.  The  greatest  inconvenience  from  such  a  defi 
ciency  to  society  would  be  a  real  scarcity  of  shillings 
and  pence  as  occurred  occasionally  in  England ;  were 
it  to  last  any  time,  very  small  notes  would  speedily 
make  their  appearance.  The  United  States  would  be 
protected  by  their  smaU  notes. 

The  true  inconvenience  resulting  from  contraction  lies 
in  a  totally  different  region,  and  would  undoubtedly  be 
real,  and  must  be  fairly  admitted.  We  have  seen  that  an 
inconvertible  paper  currency  leads  to  a  rise  of  general 
prices  in  all  markets.  The  notes  are  worth  less  than 


I  70   RESTORED  CONFIDENCE  WOULD  CHEAPEN  GOODS. 

metallic  dollars,  they  are  depreciated ;  every  seller  in 
every  store  is  obliged  to  demand  more  of  them  for  the 
same  goods,  in  order  to  obtain  in  the  paper  money  the 
full  value  of  the  things  he  sells.  Under  contraction  the 
difference  between  gold  and  paper  would  lessen  and 
ultimately  disappear ;  and  along  with  this  movement 
there  would  be  another  by  its  side  in  prices  which  would 
gradually  become  less.  The  effect  of  this  process  on 
debtors  and  creditors  would  be  real.  Every  debtor  who 
owed  paper  dollars  would  find,  as  contraction  went  on, 
that  to  procure  these  notes  he  must  give  a  larger 
quantity  of  his  property.  He  is  pledged  to  pay  so  many 
dollars ;  but  as  the  dollars  grew  in  value,  the  prices  of 
his  goods  would  be  lower,  because  each  single 
dollar  was  worth  more,  and  to  procure  the  dollars  neces 
sary  to  discharge  his  debt,  he  cannot  acquire  them 
except  at  a  larger  cost  of  property  given  for  them. 
Thus,  as  the  paper  dollar  advances  to  par  with  gold,  the 
debtor  whose  debt  is  of  long  standing  necessarily  loses. 
But  equally  did  the  creditors  lose  as  inflation  went  on ; 
they  successively  received  dollars  which  bought  less 
and  less  as  prices  advanced  in  the  stores.  This  inevi 
table  loss  to  debtors  and  creditors  in  turn  is  the  curse 
of  inconvertible  currency,  and  for  that  very  reason  it  is 
that  steadiness  of  value  is  the  first  quality  of  a  good 
currency.  The  loss  which  resumption  will  bring  to 
some  debtors  is  to  be  regretted,  but  it  cannot  in  any 
way  be  pleaded  as  a  ground  for  persevering  in  incon- 


WHAT  IS  A  BANK  ?  171 

vertible  notes  and  rejecting  specie  payments.  In  the 
first  place,  this  loss  will  go  on,  and  does  go  on  now, 
incessantly,  and  the  premium  on  gold  varies  constantly 
from  time  to  time ;  it  has  varied  from  upwards  of  133 
to  10,  between  1865  and  1871 — and  all  these  movements 
up  and  down  have  injured  debtors  or  creditors.  This 
fact  alone  suffices  to  repel  the  objection  that  contraction 
and  resumption  will  injure  debtors.  But  secondly,  with 
a  period  so  distant  as  1879,  most  old  debts  will  have 
been  cleared  off,  and  all  new  ones  be  made  more 
and  more  on  the  basis  of  a  dollar  of  gold.  The  ulti 
mate  remainder  of  old  debts,  formed  under  a  great 
difference  between  paper  and  gold,  would  be  insig 
nificant. 

But  even  were  it  not  so,  and  that  a  serious  loss  must 
fall  on  debtors,  the  plea  that  this  loss  ought  to  bar  the 
resumption  of  specie  payment  would  deserve  no  con 
sideration  whatever.  It  proves  too  much,  and  that 
fault  in  logic  renders  every  argument  worthless.  It 
would  land  mankind  in  a  practical  absurdity  of  the 
highest  order.  To  demand  that  bad  legislation  shall 
be  persevered  in  because  the  return  to  good  legislation 
would  involve  suffering  to  some,  or  even  to  all,  would 
sentence  society  to  moral  petrifaction.  Progress 
would  be  impossible,  for  the  mode  of  existence  of  man 
would  have  been  surrendered  to  a  past  generation 
which  had  made  bad  laws  that  could  not  be  altered. 
Men,  whether  as  collected  in  nations  or  as  individuals; 


172    INCONVERTIBLE  PAPER  CURRENCY  UTTERLY  BAD. 

cannot  do  wrong  without  suffering,  and  that  suffering 
must  be  endured,  if  the  wrong  is  to  be  made  to  cease. 
It  is  pure  irrationality,  and  never  is  or  could  be  endured 
in  practice,  that  a  nation  cannot  put  away  evil  because 
some  pain  must  be  incurred  in  the  act.  How  many 
keepers  of  hotels  and  owners  of  coaches  were  deeply 
injured  in  England  by  the  introduction  of  railways  ? 
How  many  in  the  United  States  by  the  abolition  of 
slavery  ?  (The  loss  which  a  few  debtors  would  suffer  by 
resumption  cannot  be  taken  into  the  least  account 
against  the  abolition  of  so  bad  and  loss-inflicting  an  in 
stitution  as  an  inconvertible  paper  currencyN  Whether 
that  loss  could  be  mitigated  by  some  arrangements  in 
the  carrying  out  of  resumption  is  a  totally  different 
matter,  and  one  quite  deserving  of  consideration ;  but 
I  confess  I  have  seen  no  suggestion  respecting  it  which 
seems  practicable,  and  I  am  not  aware  that  any  country, 
on  its  return  back  to  metallic  currency,  adopted  any 
process  of  this  nature. 


APPENDIX. 


It  seems  desirable  to  add  the  following  remarks  to 
Chapter  I. : — 

A. 

THIS  option  of  the  debtor  to  select  that  currency  whose  metallic 
value  is  overrated  by  the  law  of  legal  tender  illustrates  the  principle 
that  a  better  currency  is  always  driven  off  by  one  that  is  inferior. 
Thus  when  some  little  time  ago  silver  in  France  possessed  a  higher 
value  than  that  assigned  to  it  by  the  relation  of  twenty  francs  being 
equal  to  one  Napoleon,  it  became  profitable  to  purchase  silver 
francs  with  imported  gold,  which  was  converted  into  Napoleons 
or  accepted  in  payment  as  being  equivalent  to  twenty  francs.  This 
profit  poured  an  immense  quantity  of  gold  into  France,  rand  the 
old  premium  which  travellers  had  to  pay  on  entering  France  to 
obtain  gold  coins  vanished,  and  the  currency  of  France  was  to  a 
large  degree  converted  into  gold.  Silver  left  her  shores  ;  for  there 
was  gain  in  buying  silver  coins  with  imported  gold,  to  sell  later 
the  purchased  silver  at  its  natural  value  in  some  foreign  land. 
Similarly  with  light  sovereigns  in  England,  they  pass  from  hand 
to  hand  undetected,  each  holder  of  them  assuming  them  to  be  of 
full  weight,  and  each  one  preferring  the  chance  of  being  able  to 
pass  them  on  to  the  trouble  of  weighing  them  before  accepting 
them  in  payment.  But  there  are  a  few  who  know  better,  and 
whose  continuous  action  has  great  results.  They  are  under  the 
obligation  to  remit  gold  to  foreign  countries,  and  they  are  careful 
to  select  the  sovereigns  of  full  weight.  The  light  ones  remain  in 
England,  ever  increased  in  number  by  the  wear  and  tear  of  daily 
use,  and  it  is  not  difficult  to  foresee  that  they  might  constitute  so 
large  a  proportion  of  the  metallic  currency  of  the  nation  as  to  call 


1 74  APPENDIX. 

for  a  rectification  of  their  deficient  value  at  the  cost  of  the  last 
unfortunate  holders. 

Adulterated  coins  stand  on  a  rather  different  basis.  They  are 
not  light  coins,  reduced  in  weight  by  wear  and  tear.  They  are 
full-weighted  of  their  kind,  but  the  quantity  of  precious  metal  con 
tained  in  them  is  intentionally  reduced  below  the  amount  credited 
to  them  by  popular  belief.  The  mediaeval  kings  who  issued  them 
gave  less  silver  or  gold  in  paying  their  debts  with  them  than  their 
creditors  were  entitled  to  receive  upon  the  authorised  understand 
ing  of  the  weight  and  fineness  which  ought  to  be  contained  in  them. 
This  was,  of  course,  a  palpable  fraud  in  the  payment  of  debts.  But 
it  is  important  to  remark  that,  unlike  light  coins,  they  were  sound 
money  to  the  extent  of  the  gold  or  silver  of  which  they  were  com 
posed.  If  a  quarter  of  a  sovereign  in  gold  had  been  suppressed  in 
the  coining  of  it,  the  deficiency  of  weight  being  made  up  with 
inferior  metal,  it  would  still  be  a  good  coin  for  fifteen  shillings,  as 
good  as  the  unadulterated  one  was  for  twenty.  Every  foreign 
exchange  would  be  altered  ;  the  sovereign  being  estimated  in  every 
foreign  currency  as  a  coin  worth  fifteen  shillings'  worth  of  gold,  the 
exchange  would  fall  by  one  quarter.  The  fraud  of  the  issue  would 
have  been  perpetrated  once  for  all :  the  plundered  creditor  would 
receive  three-fourths  only  of  what  was  his  due ;  but,  nevertheless, 
he  would  have  had  a  good  fifteen  shillings  coin.  Such  an  adultera 
tion  is  now  impossible,  but  it  is  well  to  understand  correctly  the 
real  character  of  what  was  done  in  the  past 


B. 

EXTRACT  FROM  PROFESSOR  PERRY'S  ADDRESS  AT  OMAHA, 
OCTOBER  i,  1874. 

Why  worse  for  farmers. — An  inconvertible  paper  money  always 
depreciated  and  always  variable  is  worse  for  farmers  than  for 
almost  anybody  else  ;  first,  on  the  ground  of  its  depreciation  ;  and 
second,  on  the  ground  of  its  variability.  As  the  value  of  money 
goes  down,  of  course  general  prices  tend  to  rise  ;  but,  unfortunately, 
they  do  not  rise  equally,  nor  in  equal  times  ;  and  some  prices  do 
not  rise  at  all.  For  example,  manufactured  goods  are  quickest  to 
experience  a  rise  of  price  owing  to  a  depreciation  of  the  currency, 


APPENDIX.  1 75 

because  as  a  rule  manufacturers  are  intelligent  men  and  know  the 
tendency  of  depreciated  money  to  depreciate  tnore,  and  thus  hasten 
to  insure  themselves  by  putting  a  higher  price  on  their  goods. 
Wages  rise  much  more  slowly  than  goods,  and  never  proportion- 
ably,  because  labourers  do  not  well  understand  the  situation,  and 
never  act  quickly  enough  to  ensure  themselves  ;  and  so  they  are 
always  great  sufferers  from  a  depreciated  money.  Real  estate 
rises  slowly  and  irregularly,  though  at  times  tumultuously,  under 
such  money,  and  never  on  the  average  so  high  as  manufactured 
goods  rise ;  while  agricultural  products,  some  parts  of  which  are 
exported  to  foreign  countries,  scarcely  rise  in  price  at  all.  The 
reason  for  this  is,  that  the  foreign  gold  price  of  that  part  which  is  ex 
ported  largely  determines  the  home  price  of  the  whole  crop.  There 
is  only  one  wholesale  price  of  wheat  of  the  same  grade  in  New 
York  city,  whether  it  is  for  export  or  whether  it  is  for  home  con 
sumption.  The  gold  price  in  Liverpool  determines  the  currency 
price  in  New  York  just  so  long  as  any  wheat  is  exported  ;  and  the 
price  in  New  York  determines  the  price  in  Chicago  and  Omaha. 
If  the  premium  on  gold,  in  consequence  of  the  use  of  a  depreciated 
currency,  were  as  high  as  the  average  rise  of  prices  arising  from 
that  depreciation,  it  would  not  be  so  unjust ;  but  it  never  is.  Gold 
is  generally  the  cheapest  thing  a-going,  so  soon  as  an  inferior 
currency  has  demonetised  it  and  thrown  it  out  of  demand ;  and  the 
•whole  consequence  to  farmers  of  the  use  of  such  a  poor  money  is, 
that  they  have  to  pay  a  great  deal  more  for  all  that  they  need  to 
buy,  and  only  get  a  very  little  more  or  nothing  at  all  for  all  that 
they  have  to  sell.  Wheat  was  no  higher  in  currency  in  1873  than 
it  was  in  gold  in  1860 ;  hams  were  not ;  lard  was  not ;  and  salt 
pork  was  not.  These  are  all  exportable  agricultural  products 
whose  current  price  is  determined  by  the  gold  money  of  the 
world's  great  market.  These  things  are  what  farmers  sell.  But 
harnesses,  boots  and  shoes,  hats  and  caps,  blankets,  all  manner  of 
clothing,  were  much  higher  in  1873  than  they  were  in  1860.  These 
manufactures  are  what  farmers  have  to  buy. 

The  injustice  of  it. — The  mischief  of  paper  money  is,  that  it 
affects  different  classes  differently,  and  the  largest  class  the  most 
injuriously  of  all.  It  raises  some  prices  much,  other  prices  little, 
and  still  other  prices  not  at  all.  Some  prices  are  raised  quickly 


1 76  APPENDIX. 

and  pretty  regularly,  and  other  prices  are  raised  slowly  and  irregu 
larly;  so  that  the  shrewd  ones  always  take  advantage  of  the 
ignorant  ones,  and  the  dishonest  ones  of  the  honest  ones.  The 
whole  trick  of  the  thing  is  a  trick  of  distribution.  Some  men  may 
get  rich  out  of  it,  but  this  is  always  at  the  expense  of  other  men. 
All  classes  of  the  people  are  ultimately  great  losers  in  wealth  and 
reputation  from  the  destruction  of  the  stable  measure  of  value — 
from  disturbing  the  meaning  of  the  word  dollar.  A  huge  crop  of 
defaulters  and  of  failures  and  of  bursted  speculations  and  of  ruined 
reputations  are  always  the  harvest  of  that  sowing.  But  farmers 
always  have  been  and  always  will  be  the  greatest  losers  from  rag- 
money  ;  partly  for  the  reason  that  I  have  just  given — namely,  that 
what  they  have  to  buy  is  enhanced  in  price  by  it,  while  what  they 
have  to  sell  is  not  enhanced  in  price  by  it ;  and  partly  also,  because 
it  takes  the  farmer  almost  a  year  to  realise  on  his  crops,  and  he 
cannot  meanwhile  insure  himself  against  the  inevitable  changes  in 
the  currency.  The  dollar  in  which  he  calculates  the  expenses  of 
his  crop  is  almost  sure  not  to  be  the  dollar  in  which  he  realises  the 
results  of  his  crops.  He  cannot  calculate.  He  cannot  insure 
himself.  He  is  helpless.  The  manufacturer  who  turns  off  his  pro 
duct  weekly  or  monthly  can  vary  his  prices  weekly  or  monthly,  and 
save  himself  at  least  in  part ;  but  the  farmer,  poor  man,  can  do  no 
such  thing.  He  is  at  the  mercy  of  currency-tinkers.  Because  all 
our  paper  money  is  only  a  promise  to  pay,  and  an  unfulfilled 
promise  at  that ;  because  it  is  depreciated  far  below  the  solid 
money  of  the  world's  market ;  because  it  is  variable  in  value  from 
day  to  day  and  from  year  to  year,  unsettling  the  measure  of  all 
other  values  ;  because  such  money  always  stimulates  speculation 
and  hampers  productive  industry ;  because  it  corrupts  public 
morals,  undermines  honesty,  and  makes  defaulters,  by  destroying 
the  stable  standard  of  value  ;  because  it  unjustly  distributes  the 
rewards  of  industry,  and  cheats  by  wholesale  the  whole  farming 
interests  ;  and  because  such  money  has  always  been  followed  by 
these  results  wheresoever  the  experiment  has  been  tried ;  I  do 
hereby  invite  all  farmers,  east  and  west,  all  grangers,  north  and 
south,  and  all  other  true  men,  to  unite  with  me  in  raising  a  cry  that 
shall  pierce  the  dulled  ears  of  our  rulers — AN  HONEST  CRY  FOR 

AN  HONEST  DOLLAR. 


JUST     PUBLISHED. 

Money  and  the  Mechanism  of  Exchange. 

Vol.  XYII.  of  the  INTEBNATIONAL  SCIENTIFIC  SEKIES.  By  W.  STANLEY  JEVONS,  M.  A., 
F.  R.  8.,  Professor  of  Logic  and  Political  Economy  in  the  Owens  College,  Man-  • 
Chester.  1  vol.,  12mo.  Cloth.  Price,  $1.75. 

"  He  offers  us  what  a  clear-sighted,  cool-headed,  scientific  student  has  to  say  on  the 
nature,  properties,  and  natural  laws  of  money,  without  regard  to  local  interests  Or  na 
tional  bias.  His  work  is  popularly  written,  and  every  page  is  replete  with  solid  instruc 
tion  of  a  kind  that  is  just  now  lamentably  needed  by  multitudes  of  our  people  who  are 
victimized  by  the  grossest  fallacies."— Popular  Science  Monthly. 

"  If  Professor  Jevons's  book  is  read  as  extensively  as  it  deserves  to  be,  we  shall 
have  sounder  views  on  the  use  and  abuse  of  money,  and  more  correct  ideas  on  what  a 
circulating  medium  really  means." — Boston  Saturday  Evening  Gazette. 

"  Prof.  Jevons  writes  in  a  sprightly  but  colorless  style,  without  trace  of  either 
prejudice  or  mannerism,  and  shows  no  commitment  to  any  theory.  The  time  is  not 
very  far  distant,  we  hope,  when  legislators  will  cease  attempting  to  legislate  upon 
money  before  they  know  what  money  is,  and,  as  a  possible  help  toward  such  a  change, 
Prof.  Jevons  deserves  the  credit  of  having  made  a  useful  contribution  to  a  depart 
ment  of  study  long  too  much  neglected,  but  of  late  years,  we  are  gratified  to  say,  be 
coming  less  so"— The  Financier,  New  York. 


Weights,  Measures,  and  Money,  of  all  Nations. 

Compiled  by  F.  W.  CLARKE,  S.  B.,  Professor  of  Physics  and  Chemistry  in  the  Uni 
versity  of  Cincinnati.  Price,  $1.50. 

"  This  work  -will  be  found  very  useful  to  the  merchant,  economist,  and  banker,  as 
the  arrangement  is  highly  convenient  for  reference,  and  in  a  form  and  classification 
never  before  presented  to  the  public.  It  also  contains  a  series  of  tables,  arranged  alpha 
betically,  showing  the  value  of  each  unit  as  given  both  in  the  English  and  the  metric 
standards.  The  metric  system  is  used  coextensively  with  the  ordinary  system,  and 
is  a  characteristic  feature  of  the  book. 

"The  contents,  among  other  things,  contain  the  following  useful  and  comprehen 
sive  tables,  viz. :  I.  Measures  of  Length,  in  both  the  English  or  American  feet  or 
inches,  and  in  French  metres.  II.  Eoad-Measures  in  English  miles  and  French  kilo 
metres.  III.  Land-Measures.  IV.  Cubic  Measures.  V.  Liquid  Measures.  VI. 
Dry  Measures.  VII.  Weights,  and  finally  Money.  This  latter  table  is  one  of  the  most 
useful  and  valuable  tables  probably  to  be  found,  giving  as  it  does  the  standards  in 
dollars,  francs,  sterling,  and  marks,  and  alone  is  worth  the  cost  of  the  book."— N.  T. 
Commercial  and  Financial  Chronicle. 

"  "We  commend  this  carefully-prepared  and  convenient  volume  to  all  persons  who 
wish  to  acquire  information  on  the  subject  of  which  it  treats."— Boston  Globe. 

"The  work  necessary  to  the  production  of  this  little  volume  has  been  judiciously 
planned  and  skillfully  executed."—  Chicago  Tribune. 

D.  APPLETON  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y. 


THE  INTERNATIONAL  SCIENTIFIC  SERIES. 


D.  APPLETON  &  Co.  have  the  pleasure  of  announcing  that  they  have  made  arrange- 
merits  for  publishing,  and  have  recently  commenced  the  issue  of,  a  SERIES  OF  POPU 
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names  and  subjects  included  in  the  subjoined  list,  from  which  it  will  be  seen  that  the 
cooperation  of  the  most  distinguished  professors  in  England,  Germany,  France,  and  the 
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originated  and  organized  by  Dr.  E.  L.  Youmans,  who  has  spent  much  time  in  Europe, 
arranging  with  authors  and  publishers. 

FORTHCOMING   VOLUMES. 

Prof.  W.   KINGDON  CLIFFORD,   M.  A.     The  First  Principles  of  the  Exact 

Sciences  explained  to  the  Non-mathematical. 

Prof.  T.  H.  HUXLEY,  LL.  D.,  F.  R.  S.     Bodily  Motion  and  Consciousness. 

Dr.  W.  B.  CARPENTER,  LL.  D.,  F.  R.  S.     The  Physical  Geography  of  the  Sea. 

Prof.  WILLIAM  ODLING,  F.  R.  S.  The  Old  Chemistry  -viewed  from  the  New 
Stand-point. 

W.  LAUDER  LINDSAY,  M.  D.,  F.  R.  S.  E.    Mind  in  the  Lower  Animals. 
Sir  JOHN  LUBBOCK,  Bart,  F.  R.  S.     On  Ants  and  Bees. 

Prof.  W.  T.  THISELTON  DYER,  B.  A.,  B.  Sc.  Form  and  Habit  in  Flowering 
Plants. 

Mr.  J.  N.  LOCKYER,  F.  R.  S.     Spectrum  Analysis. 

Prof.  MICHAEL  FOSTER,  M.  D.     Protoplasm  and  the  Cell  Theory. 

H.  CHARLTON  BASTIAN,  M.  D.,  F.  R.  S.     The  Brain  as  an  Organ  of  Mind. 

Prof.  A.  C.  RAMSAY,  LL.  D.,  F.  R.  S.  Earth  Sculpture:  Hills,  Valleys,  Moun 
tains,  Plains,  Rivers,  Lakes;  How  they  were  Produced,  and  how  they  have 
been  Destroyed. 

Prof.  RUDOLPH  VI RCHOW  (Berlin  University).    Morbid  Physiological  Action. 
Prof.  CLAUDE  BERNARD.     History  of  the  Theories  of  Life. 

D.  APPLETON  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y. 


THE  INTERNATIONAL  SCIENTIFIC  SERIES. 


FORTHCOMING   VOLUMES. 

Ko£  H.  SAINTE-CLAIRE  DEVILLE.    An  Introduction  to  General  Chemistry. 

Prof.  WURTZ.     A  toms  and  the  A  tomic  Theory. 

Pro£  De  QUATREFAGES.     The  Human  Race. 

Pro£  LACAZE-DUTHIERS.    Zoology  since  Cuvier. 

Prof.  BERTHELOT.     Chemical  Synthesis. 

Prof.  C.  A.  YOUNG,  Ph.  D.  (of  Dartmouth  College).     The  Sun. 

Prof.  OGDEN  N.  ROOD  (Columbia  College,  N.  Y.).    Modern  Chromatics  and  it* 

Relations  to  Art  and  Industry. 

Dr.  EUGENE  LOMMEL  (University  of  Erlangen).     The  Nature  of  Light. 
Prof.  J.  ROSENTHAL.     General  Physiology  of  Muscles  and  Nerves. 
Prof.  JAMES  D.  DANA,  M.  A.,  LL.  D.     On  Cephalization  ;  or,  Head~:haracUr* 

in  the  Gradation  and  Progress  of  Life. 

Prof.  S.  W.  JOHNSON,  M.  A.     On  the  Nutrition  of  Plants. 
Prof.  AUSTIN  FLINT,  Jr.,  M.  D.     The  Nervous  System,  and  its  Relation  to  ikt 

Bodily  Functions, 

Prof.  BERNSTEIN  (University  of  Halle).     The  Five  Senses  of  Man. 
Prof.  FERDINAND  COHN  (Breslau  University).      Thallophytes  (Algce,  Lichen, 

Fungi). 

Prof.  HERMANN  (University  oi  Zurich).     Respiration. 

Prof.  LEUCKART  (University  of  Leipsic).     Outlines  of  Animal  Organization. 
Prof.  LIEBREICH  (University  of  Berlin).     Outlines  of  Toxicology. 
Prof.  KUNDT  (University  of  Strasburg).     On  Sound. 
Prof.  REES  (University  of  Erlangen).     On  Parasitic  Plants. 

Prof.  STEINTHAL  (University  of  Berlin).     Outlines  of  the  Science  of  Language. 
P.  BERT  (Professor  of  Physiology,  Paris).     Forms  of  Life  and  other  Cosmical  Co*, 
ditions. 

E.  ALGLA  VE  (Professor  of  Constitutional  and  Administrative  Law  at  Douai,  and  of 
Political  Economy  at  Lille).  The  Primitive  Elements  of  Political  Constitutions. 

P.  LORAIN  (Professor  of  Medicine,  Paris).    Modern  Epidemics. 

Prof.  SCHUTZENBERGER  (Director  of  the  Chemical  Laboratory  at  the  SOT. 
bonne).  On  Fermentations. 

Mons.  FREIDEL.     The  Functions  of  Organic  Chemistry. 

Mons.  DEBRAY.    Precious  Metals. 

Prof.  CORFIELD,  M.  A.,  M.  D.  (Oxon.).     Air  in  its  Relation  to  Health. 

Prof.  A.  GIARD.     General  Embryology. 

D.  APPLETON  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y. 


Opinions  of  the  Press  on  the  "International  Scientific  Series* 


Tyndall's  Forms  of  Water. 

I  vol.,  I2mo.     Cloth.     Illustrated Price,  $1.50. 

"  In  the  volume  now  published,  Professor  Tyndall  has  presented  a  noble  illustration 
of  the  acuteness  and  subtlety  of  his  intellectual  powers,  the  scope  and  insight  of  his 
scientific  vision,  his  singular  command  of  the  appropriate  language  of  exposition,  and 
the  peculiar  vivacity  and  grace  with  which  he  unfolds  the  results  of  intricate  scientific 
research." — N.  Y.  Tribune. 

"  The  '  Forms  of  Water,'  by  Professor  Tyndall,  is  an  interesting  and  instructive 
little  volume,  admirably  printed  and  illustrated.  Prepared  expressly  for  this  series,  it 
is  in  some  measure  a  guarantee  of  the  excellence  of  the  volumes  that  will  follow,  and  an 
indication  that  the  publishers  will  spare  no  pains  to  include  in  the  series  the  freshest  in 
vestigations  of  the  best  scientific  minds." — Boston  Journal. 

"  This  series  is  admirably  commenced  by  this  little  volume  from  the  pen  of  Prof. 
Tyndall.  A  perfect  master  of  his  subject,  he  presents  in  a  style  easy  and  attractive  his 
methods  of  investigation,  and  the  results  obtained,  and  gives  to  the  reader  a  clear  con 
ception  of  all  the  wondrous  transformations  to  which  water  is  subjected." — Churchman. 


II. 

Bagehot's  Physics  and  Politics. 

I  vol.,  I2mo.     Price,  $1.50. 

"  If  the  '  International  Scientific  Series  '  proceeds  as  it  has  begun,  it  will  more  than 
flilfil  the  promise  given  to  the  reading  public  in  its  prospectus.  The  first  volume,  by 
Professor  Tyndall,  was  a  model  of  lucid  and  attractive  scientific  exposition  ;  and  now 
we  have  a  second,  by  Mr.  Walter  Bagehot,  which  is  not  only  very  lucid  and  charming^ 
but  also  original  and  suggestive  in  the  highest  degree.  Nowhere  since  the  publicati&a 
of  Sir  Henry  Maine's  'Ancient  Law,'  have  we  seen  so  many  fruitful  thoughts  sug 
gested  in  the  course  of  a  couple  of  hundred  pages.  .  .  .  To  do  justice  to  Mr.  Bage 
hot's  fertile  book,  would  require  a  long  article.  With  the  best  of  intentions,  we  are 
conscious  of  having  given  but  a  sorry  account  of  it  in  these  brief  paragraphs.  But  we 
hope  we  have  said  enough  to  commend  it  to  the  attention  of  the  thoughtful  reader."— 
Prof.  JOHN  FISKE,  in  the  Atlantic  Monthly. 

"  Mr.  Bagehot's  style  is  clear  and  vigorous.  We  refrain  from  giving  a  fuller  ac 
count  of  these  suggestive  essays,  cnly  because  we  are  sure  that  our  readers  will  find  it 
worth  their  while  to  peruse  the  book  for  themselves ;  and  we  sincerely  hope  that  the 
forthcoming  parts  of  the  'International  Scientific  Series'  will  be  as  interesting."—1 
A.  theneeunt. 

"  Mr.  Bagehot  discusses  an  immense  variety  of  topics  connected  with  the  progress 
of  societies  and  nations,  and  the  development  of  their  distinctive  peculiarities;  and  his 
book  shows  an  abundance  of  ingenious  and  original  thought" — ALFRED  RUSSELI 
WALLACE,  in  Nature. 

D.  APPLETON  &  CO.,  Publishers,  549  &  551  Broadway,  N.  Y, 


Opinions  of  the  Press  on  the  "International  Scientific  Series^ 

ill. 

Foods. 

By   Dr.  EDWARD   SMITH. 
I  vol.,  I2mo.     Cloth.     Illustrated Price,  $1.75. 

In  making  up  THE  INTERNATIONAL  SCIENTIFIC  SERIES,  Dr.  Edward  Smith  was  se 
lected  as  the  ablest  man  in  England  to  treat  the  important  subject  of  Foods.  His  services 
were  secured  for  the  undertaking,  and  the  little  treatise  he  has  produced  shows  that  the 
choice  of  a  writer  on  this  subject  was  most  fortunate,  as  the  book  is  unquestionably  the 
clearest  and  best-digested  compend  of  the  Science  of  Foods  that  has  appeared  in  our 
language. 

"  The  book  contains  a  series  of  diagrams,  displaying  the  effects  of  sleep  and  meals 
on  pulsation  and  respiration,  and  of  various  kinds  of  food  on  respiration,  which,  as  the 
results  of  Dr.  Smith's  own  experiments,  possess  a  very  high  value.  We  have  not  far 
to  go  in  this  work  for  occasions  of  favorable  criticism  ;  they  occur  throughout,  but  are 
perhaps  most  apparent  in  those  parts  of  the  subject  with  which  Dr.  Smith's  name  is  es 
pecially  linked." — London  Examiner. 

"  The  union  of  scientific  and  popular  treatment  in  the  composition  of  this  work  will 
afford  an  attraction  to  many  readers  who  would  have  been  indifferent  to  purely  theoreti 
cal  details.  .  .  .  Still  his  work  abounds  in  information,  much  of  which  is  of  great  value, 
and  a  part  of  which  could  not  easily  be  obtained  from  other  sources.  Its  interest  is  de 
cidedly  enhanced  for  students  who  demand  both  clearness  and  exactness  of  statement, 
by  the  profusion  of  well-executed  woodcuts,  diagrams,  and  tables,  which  accompany  th^ 
volume.  .  .  .  The  suggestions  of  the  author  on  the  use  of  tea  and  coffee,  and  of  the  va 
rious  forms  of  alcohol,  although  perhaps  not  strictly  of  a  novel  character,  are  highly  in- 
structive,  and  form  an  interesting  portion  of  the  volume." — N.  K.  Tribune. 


IV. 

Body  and  Mind. 

THE    THEORIES   OF   THEIR   RELATION. 

By  ALEXANDER    BAIN,    LL.  D. 
I  vol.,   I2mo.      Cloth Price,   $1.50. 

PROFESSOR  BAIN  is  the  author  of  two  well-known  standard  works  upon  the  Science 
»f  Mind — "The  Senses  and  the  Intellect,"  and  "The  Emotions  and  the  Will."  He  is 
one  of  the  highest  living  authorities  in  the  school  which  holds  that  there  can  be  no  sound 
or  valid  psychology  unless  the  mind  and  the  body  are  studied,  as  they  exist,  together. 

"  It  contains  a  forcible  statement  of  the  connection  between  mind  and  body,  study 
ing  their  subtile  interworkings  by  the  light  of  the  most  recent  physiological  investiga 
tions.  The  summary  in  Chapter  V.,  of  the  investigations  of  Dr.  Lionel  Beale  of  the 
embodiment  of  the  intellectual  functions  in  the  cerebral  system,  will  be  found  the 
freshest  and  most  interesting  part  of  his  book.  Prof.  Bain's  own  theory  of  the  connec 
tion  between  the  mental  and  the  bodily  part  in  man  is  stated  by  himself  to  be  as  follows  : 
There  is  '  one  substance,  with  two  sets  of  properties,  two  sides,  the  physical  and  the 
mental — a  double-faced  unity.'  While,  in  the  strongest  manner,  asserting  the  union 
of  mind  with  brain,  he  yet  denies  'the  association  of  union  in  place,'  but  asserts  the 
union  of  close  succession  in  time,'  holding  that  '  the  same  being  is,  by  alternate  fits,  un 
der  extended  and  under  unextended  consciousness."  ' — Christian  Register. 

D.  APPLETON  &  CO.,  Publishers,  549  &  551  Broadway,  N.  Y. 


Opinions  of  the  Press  on  the  "  International  Scientific  Series." 

v. 

The  Study  of  Sociology. 

By  HERBERT   SPENCER. 
I  vol.,  I2mo.     Cloth Price,  $1.50. 

"  The  philosopher  whose  distinguished  name  gives  weight  and  influence  to  this  vol 
ume,  has  given  in  its  pages  some  of  the  finest  specimens  of  reasoning  in  all  its  forms 
and  departments.  There  is  a  fascination  in  his  array  of  facts,  incidents,  and  opinions, 
which  draws  on  the  reader  to  ascertain  his  conclusions.  The  coolness  and  calmness  of 
his  treatment  of  acknowledged  difficulties  and  grave  objections  to  his  theories  win  for 
him  a  close  attention  and  sustained  effort,  on  the  part  of  the  reader,  to  comprehend,  fol 
low,  grasp,  and  appropriate  his  principles.  This  book,  independently  of  its  bearing 
upon  sociology,  is  valuable  as  lucidly  showing  what  those  essential  characteristics  are 
which  entitle  any  arrangement  and  connection  of  facts  and  deductions  to  be  called  a 
science. ' ' — Episcopalian. 

"  This  work  compels  admiration  by  the  evidence  which  it  gives  of  immense  re 
search,  study,  and  observation,  and  is,  withal,  written  in  a  popular  and  very  pleasing 
style.  It  is  a  fascinating  work,  as  well  as  one  of  deep  practical  thought." — Bost.  Post. 

"  Herbert  Spencer  is  unquestionably  the  foremost  living  thinker  in  the  psychological 
and  sociological  fields,  and  this  volume  is  an  important  contribution  to  the  science  of 
which  it  treats.  ...  It  will  prove  more  popular  than  any  of  its  author's  other  creations, 
for  it  is  more  plainly  addressed  to  the  people  and  has  a  more  practical  and  less  specu 
lative  cast.  It  will  require  thought,  but  it  is  well  worth  thinking  about."— Albany 
Evening  Journal. 

VI. 

The   New  Chemistry. 

By  JOSIAH  P.  COOKE,  JR., 

Erving  Professor  of  Chemistry  and  Mineralogy  in  Harvard  University. 
I  vol.,  I2mo.     Cloth Price,  $2.00. 

"  The  book  of  Prof.  Cooke  is  a  model  of  the  modern  popular  science  work.  It  has 
just  the  due  proportion  of  fact,  philosophy,  and  true  romance,  to  make  it  a  fascinating 
companion,  either  for  the  voyage  or  the  study." — Daily  Graphic. 

"  This  admirable  monograph,  by  the  distinguished  Erving  Professor  of  Chemistry 
in  Harvard  University,  is  the  first  American  contribution  to  'The  International  Scien 
tific  Series,"  and  a  more  attractive  piece  of  work  in  the  way  of  popular  exposition  upon 
a  difficult  subject  has  not  appeared  in  a  long  time.  It  not  only  well  sustains  the  char 
acter  of  the  volumes  with  which  it  is  associated,  but  its  reproduction  in  European  coun 
tries  will  be  an  honor  to  American  science." — New  York  Tribune. 

"All  the  chemists  in  the  country  will  enjoy  its  perusal,  and  many  will  seize  upon  it 
as  a  thing  longed  for.  For,  to  those  advanced  students  who  have  kept  well  abreast  of 
the  chemical  tide,  it  offers  a  calm  philosophy.  To  those  others,  youngest  of  the  class, 
who  have  emerged  from  the  schools  since  new  methods  have  prevailed,  it  presents  a 
generalization,  drawing  to  its  use  all  the  data,  the  relations  of  which  the  newly-fledged 
fact-seeker  may  but  dimly  perceive  without  its  aid.  ...  To  the  old  chemists,  Prof. 
Cooke's  treatise  is  like  a  message  from  beyond  the  mountain.  They  have  heard  o/ 
changes  in  the  science;  the  clash  of  the  battle  of  old  and  new  theories  has  stirred  them 
from  afar.  The  tidings,  too,  had  come  that  the  old  had  given  way ;  and  little  more  than 
this  they  knew.  .  .  .  Prof.  Cooke's '  New  Chemistry'  must  do  wide  service  in  bringing 
to  close  sight  the  little  known  and  the  longed  for.  ...  As  a  philosophy  it  is  elemen* 
tary,  but,  as  a  book  of  science,  ordinary  readers  will  find  it  sufficiently  advanced.  "•»» 
Utica  Morning  Herald. 

D.  APPLETON  &  CO.,  Publishers,  549  &  551  Broadway,  N.  Y. 


Opinions  of  the  Press  on  the  "International  Scientific  Series." 

VII. 

The  Conservation  of  Energy. 

By  BALFOUR  STEWART,  LL.  D,,  F.  R.  S. 

With  an  Appendix  treating  of  the  Vital  and  Mental  Applications  of  the  Doctrine. 
I  vol.,  I2mo.     Cloth.     Price,  $1.50. 

"  The  author  has  succeeded  in  presenting  the  facts  in  a  clear  and  satisfactory  manner, 
using  simple  language  and  copious  illustration  in  the  presentation  of  facts  and  prin 
ciples,  confining  himself,  however,  to  the  physical  aspect  of  the  subject.  In  the  Ap 
pendix  the  operation  of  the  principles  in  the  spheres  of  life  and  mind  is  supplied  by 
the  essays  of  Professors  Le  Conte  and  Bain." — Ohio  Farmer. 

"  Prof.  Stewart  is  one  of  the  best  known  teachers  in  Owens  College  in  Manchester. 

"  The  volume  of  THE  INTERNATIONAL  SCIENTIFIC  SERIES  now  before  us  is  an  ex- 
cellent  illustration  of  the  true  method  of  teaching,  and  will  well  compare  with  Prof. 
Tyndall's  charming  little  book  in  the  same  series  on  '  Forms  of  Water,"  with  illustra 
tions  enough  to  make  clear,  but  not  to  conceal  his  thoughts,  in  a  style  simple  and 
brief." — Christian  Register,  Boston. 

"  The  writer  has  wonderful  ability  to  compress  much  information  into  a  few  words. 
It  is  a  rich  treat  to  read  such  a  book  as  this,  when  there  is  so  much  beauty  and  force 
combined  with  such  simplicity. — Eastern  Press. 


VIII. 

Animal  Locomotion; 

Or,  WALKING,   SWIMMING,  AND  FLYING. 

With  a  Dissertation  on  Aeronautics. 

By  J.  BELL  PETTIGREW,  M.  D.,  F.  R.  S.,  F.  R.  S.  E., 
F.  R.C.  P.E. 

I  vol.,  I2mo Price,  $1.75. 

"  This  work  is  more  than  a  contribution  to  the  stock  of  entertaining  knowledge, 
though,  if  it  only  pleased_,  that  would  be  sufficient  excuse  for  its  publication.  But  Dr. 
Pettigrew  has  given  his  time  to  these  investigations  with  the  ultimate  purpose  of  solv 
ing  the  difficult  problem  of  Aeronautics.  To  this  he  devotes  the  last  fifty  pages  of  hi* 
book.  Dr.  Pettigrew  is  confident  that  man  will  yet  conquer  the  domain  of  the  air."— 
N.  Y.  Journal  of  Commerce. 

"  Most  persons  claim  to  know  how  to  walk,  but  few  could  explain  the  mechanical 
principles  involved  in  this  most  ordinary  transaction,  and  will  be  surprised  that  the 
movements  of  bipeds  and  quadrupeds,  the  darting  and  rushing  motion  of  fish,  and  the 
erratic  flight  of  the  denizens  of  the  air,  are  not  only  anologous,  but  can  be  reduced  to 
similar  formula.  The  work  is  profusely  illustrated,  and,  without  reference  to  the  theory 
it  is  designed  to  expound,  will  be  regarded  as  a  valuable  addition  to  natural  history." 
—Omaha  Republic. 

D.  APPLETON  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y, 


Opinions  of  the  Press  on  the  "International  Scientific  Series." 


IX. 

Responsibility  in  Mental  Disease. 

By  HENRY   MAUDSLEY,    M.  D., 

Fellow  of  the  Royal  College  of  Physicians ;  Professor  of  Medical  Jurisprudence 
in  University  College,  London. 

I  vol.,   I2mo.     Cloth,     i     .     Price,  $1.50. 

"  Having  lectured  in  a  medical  college  on  Mental  Disease,  this  book  has  been  a 
feast  to  us.  It  handles  a  great  subject  in  a  masterly  manner,  and,  in  our  judgment,  the 
positions  taken  by  the  author  are  correct  and  well  sustained." — Pastor  and  People. 

"  The  author  is  at  home  in  his  subject,  and  presents  his  views  in  an  almost  singu 
larly  clear  and  satisfactory  manner.  .  .  .  The  volume  is  a  valuable  contribution  to  one 
of  the  most  difficult,  and  at  the  same  time  one  of  the  most  important  subjects  of  inves 
tigation  at  the  present  day." — N.  Y.  Observer. 

"  It  is  a  work  profound  and  searching,  and  abounds  in  wisdom." — Pittsburg  Com 
mercial. 

"  Handles  the  important  topic  with  masterly  power,  and  its  suggestions  are  prac 
tical  and  of  great  value." — Providence  Press. 

X. 

The  Science  of  Law. 

By  SHELDON  AMOS,  M.  A., 

Professor  of  Jurisprudence  in  University  College,  London;  author  of  "A  Systematic 

View  of  the  Science  of  Jurisprudence,"  "  An  English  Code,  its  Difficulties 

and  the  Modes  of  overcoming  them,"  etc.,  etc. 

I  vol.,  I2mo.     Cloth Price,  $1.75. 

"The  valuable  series  of  'International  Scientific'  works,  prepared  by  eminent  spe 
cialists,  with  the  intention  of  popularizing  information  in  their  several  branches  of 
knowledge,  has  received  a  good  accession  in  this  compact  and  thoughtful  volume.  It 
is  a  difficult  task  to  give  the  outlines  of  a  complete  theory  of  law  in  a  portable  volume, 
which  he  who  runs  may  read,  and  probably  Professor  Amos  himself  would  be  the  last 
to  claim  that  he  has  perfectly  succeeded  in  doing  this.  But  he  has  certainly  done  much 
to  clear  the  science  of  law  from  the  technical  obscurities  which  darken  it  to  minds  which 
have  had  no  legal  training,  and  to  make  clear  to  his  '  lay '  readers  in  how  true  and  high  a 
sense  it  can  assert  its  right  to  be  considered  a  science,  and  not  a  mere  practice." — Tht 
Christian.  Register. 

"The  works  of  Bentham  and  Austin  are  abstruse  and  philosophical,  and  Maine's 
require  hard  study  and  a  certain  amount  of  special  training.  The  writers  also  pursue 
different  lines  of  investigation,  and  can  only  be  regarded  as  comprehensive  in  the  de 
partments  they  confined  themselves  to.  It  was  left  to  Amos  to  gather  up  the  result 
and  present  the  science  in  its  fullness.  The  unquestionable  merits  of  this,  his  last  book, 
are,  that  it  contains  a  complete  treatment  of  a  subject  which  has  hitherto  been  handled 
by  specialists,  and  it  opens  up  that  subject  to  every  inquiring  mind.  ...  To  do  justice 
to  '  The  Science  of  Law '  would  require  a  longer  review  than  we  have  space  for.  We 
have  read  no  more  interesting  and  instructive  book  for  some  time.  Its  themes  concern 
every  one  who  renders  obedience  to  laws,  and  who  would  have  those  laws  the  best 
possible.  The  tide  of  legal  reform  which  set  in  fifty  years  ago  has  to  sweep  yethighei 
if  the  flaws  in  our  jurisprudence  are  to  be  removed.  The  process  of  change  cannot  be 
better  guided  than  by  a  well-informed  public  mind,  and  Prof.  Amos  has  done  great 
service  in  materially  helping  to  promote  this  end." — ^Buffalo  Courier. 

D.  APPLETQN  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y- 


Opinions  of  the  Press  on  the  "International  Scientific  Series" 

XI. 

Animal  Mechanism, 

A  Treatise  on  Terrestrial  and  Aerial  Locomotion. 

By  E.  J.  MAREY, 

Professor  at  the  College  of  France,  and   Member  of  the  Academy  of  Medicine. 

With  117  Illustrations,  drawn  and  engraved  under  the  direction  of  the  author. 

i  vol.,  i2mo.     Cloth Price,  $1.75 

"  We  hope  that,  in  the  short  glance  which  we  have  taken  of  some  of  the  most  im 
portant  points  discussed  in  the  work  before  us,  we  have  succeeded  in  interesting  our 
readers  sufficiently  in  its  contents  to  make  them  curious  to  learn  more  of  its  subject- 
matter.  We  cordially  recommend  it  to  their  attention. 

"  The  author  of  the  present  work,  it  is  well  known,  stands  at  the  head  of  those 
physiologists  who  have  investigated  the  mechanism  of  animal  dynamics — indeed,  we 
may  almost  say  that  he  has  made  the  subject  his  own.  By  the  originality  of  his  con 
ceptions,  the  ingenuity  of  his  constructions,  the  skill  of  his  analysis,  and  the  persever 
ance  of  his  investigations,  he  has  surpassed  all  others  in  the  power  of  unveiling  the 
complex  and  intricate  movements  of  animated  beings." — Popular  Science  Monthly. 

XII. 

History   of  tke   Conflict    between 
Religion  and  Science. 

By  JOHN  WILLIAM  DRAPER,  M.  D.,  LL.  D., 

Author  of  "  The  Intellectual  Development  of  Europe." 
i  vol.,  lamo. Price,  $1.75. 

"This  little  '  History'  would  have  been  a  valuable  contribution  to  literature  at  any 
<ime,  and  is,  in  fact,  an  admirable  text-book  upon  a  subject  that  is  at  present  engross 
ing  the  attention  of  a  large  number  of  the  most  serious-minded  people,  and  it  is  no 
small  compliment  to  the  sagacity  of  its  distinguished  author  that  he  has  so  well  gauged 
the  requirements  of  the  times,  and  so  adequately  met  them  by  the  preparation  of  this 
volume.  It  remains  to  be  added  that,  while  the  writer  has  flinched  from  no  responsi 
bility  in  his  statements,  and  has  written  with  entire  fidelity  to  the  demands  of  truth 
and  justice,  there  is  not  a  word  in  his  book  that  can  give  offense  to  candid  and  fair- 
minded  readers." — N.  Y.  Evening  Post. 

"  The  key-note  to  this  volume  is  found  in  the  antagonism  between  the  progressive 
tendencies  of  the  human  mind  and  the  pretensions  of  ecclesiastical  authority,  as  devel 
oped  in  the  history  of  modern  science.  No  previous  writer  has  treated  the  subject 
from  this  point  of  view,  and  the  present  monograph  will  be  found  to  possess  no  less 
originality  of  conception  than  vigor  of  reasoning  and  wealth  of  erudition.  .  .  .  The 
method  of  Dr.  Draper,  in  his  treatment  of  the  various  questions  that  come  up  for  dis 
cussion,  is  marked  by  singular  impartiality  as  well  as  consummate  ability.  Through 
out  his  work  he  maintains  the  position  of  an  historian,  not  of  an  advocate.  His  tone  is 
tranquil  and  serene,  as  becomes  the  search  after  truth,  with  no  trace  of  the  impassioned 
ardor  of  controversy.  He  endeavors  so  far  to  identify  himself  with  the  contending 
parties  as  to  gain  a  clear  comprehension  of  their  motives,  but,  at  the  same  time,  he 
submits  their  actions  to  the  tests  of  a  cool  and  impartial  examination." — N.  Y.  Tribune. 

D.  APPLETON  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y. 


Opinions  of  the  Press  on  the  "International  Scientific  Series." 

XIII. 

THE   DOCTRINE   OF 

Descent,    and    Darwinism. 

By  OSCAR  SCHMIDT, 
Professor  in  the  University  of  Strasb  irg. 

WITH  26  WOODCUTS. 
I  vol.,  I2mo.     Cloth Price,  $1.50. 

"  The  entire  subject  is  discussed  with  a  freshness,  as  well  as  an  elaboration  of  de 
tail,  that  renders  his  work  interesting  in  a  more  than  usual  degree.  The  facts  upon 
which  the  Darwinian  theory  is  based  are  presented  in  an  effective  manner,  conclusions 
are  ably  defended,  and  the  question  is  treated  in  more  compact  and  available  style 
than  in  any  other  work  on  the  same  topic  that  has  yet  appeared.  It  is  a  valuable  ad 
dition  to  the  '  International  Scientific  Series.'  " — Boston  Post. 

"  The  present  volume  is  the  thirteenth  of  the  '  International  Scientific  Series,'  and 
is  one  of  the  most  interesting  of  all  of  them.  The  subject-matter  is  handled  with  a 
great  deal  of  skill  and  earnestness,  and  the  courage  of  the  author  in  avowing  his  opin 
ions  is  much  to  his  credit.  .  .  .  This  volume  certainly  merits  a  careful  perusal." — 
Hartford  Evening  Post. 

"  The  volume  which  Prof.  Schmidt  has  devoted  to  this  theme  is  a  valuable  contri 
bution  to  the  Darwinian  literature.  Philosophical  in  method,  and  eminently  candid, 
it  shows  not  only  the  ground  which  Darwin  had  in  his  researches  made,  and  conclu 
sions  reached  before  him  to  plant  his  theory  upon,  but  shows,  also,  what  that  theory 
really  is,  a  point  upon  which  many  good  people  who  talk  very  earnestly  about  the 
matter  are  very  imperfectly  informed." — Detroit  Free  Press. 

XIV. 

The  Chemistry  of  Light  and 
Photography ; 

In  its  Application  to  Art,  Science,  and   Industry. 

By  Dr.  HERMANN  VOGEL, 
Professor  in  the  Royal  Industrial  Academy  of  Berlin. 

WITH  100  ILLUSTRATIONS. 
I2mo Price,  $2.00. 

"  Out  of  Photography  has  sprung  a  new  science — the  Chemistry  of  Light — and,  in 
giving  a  popular  view  to  the  one,  Dr.  Vogel  has  presented  an  analysis  of  the  principles 
and  processes  of  the  other.  His  treatise  is  as  entertaining  as  it  is  instructive,  pleas 
antly  combining  a  history  of  the  progress  and  practice  of  photography — from  the  first 
rough  experiments  of  Wedgwood  and  Davy  with  sensitized  paper,  in  1802,  down  to 
the  latest  improvements  of  the  art — with  technical  illustrations  of  the  scientific  theories 
on  which  the  art  is  based.  It  is  the  first  attempt  in  any  manual  of  photography  to  set 
forth  adequately  the  just  claims  of  the  invention,  both  from  an  artistic  and  a  scientific 
point  of  view,  and  it  must  be  conceded  that  the  effort  has  been  ably  conducted."—- 
Chicago  Tribune, 

D.  APPLETON  &  CO.,  PUBLISHERS,  549  &  551  Broadway,  N.  Y. 


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